What happens next after the Court of Appeal invalidates the entire Finance Act 2023?

The process of raising funds from the public and allocating them to priority sectors is a cornerstone of governance. The annual budget-making process is a ritual embedded in constitutional and legal frameworks, ensuring that public funds are managed transparently and systematically.

Every year, when the Finance Bill is enacted, it adjusts or removes certain provisions from the previous Finance Act to align with the government’s current policy priorities. The Finance Act serves as a crucial tool for managing government operations throughout the financial year. Since Kenya’s independence, the country has consistently enacted a current finance bill—until this year. The Finance Act 2023 remained in force after the Finance Bill 2024 was abandoned due to strong public opposition, a situation unprecedented in Kenya’s history. However, a landmark ruling by the Court of Appeal on July 31 declared the Finance Act 2023 unconstitutional.

The court ruled that the enactment of the Finance Act 2023 violated Articles 220(1) and 221 of the Constitution, as well as sections 37, 39A, and 40 of the Public Finance Management Act (PFMA) 2012, which prescribe the budget-making process. The court’s decision rendered the Finance Act 2023 null and void from the outset, leaving Kenya without a current Finance Act to govern taxation and fiscal matters. This situation marks uncharted legal territory for the country.

The ruling followed extensive deliberations on appeals filed by over 40 parties challenging the constitutionality of various sections of the Act. The court found that critical provisions related to taxation, such as Value Added Tax, Excise Duty Tax, and Income Tax, were passed without adhering to the constitutionally required legislative process, including public participation as mandated by Articles 10 and 118 of the Constitution. Consequently, the entire Finance Act was deemed unconstitutional.

The Parliament’s competence was called into question, as it appeared to have overlooked constitutional mandates in its eagerness to pass the Finance Bill 2023. This issue has plagued the Kenya Kwanza Administration, as other laws, such as those related to the Housing Levy in 2023, have also been declared unconstitutional.

The court also addressed sections of the appeals that had become moot due to the passage of time or prior judicial rulings. These sections no longer presented live controversies requiring adjudication.

For individual and corporate taxpayers, the court’s decision creates uncertainty around the legal framework governing taxation in Kenya. Following public protests, President Ruto rejected the Finance Bill 2024 and sent it back to Parliament with instructions to delete every article, which was done on July 25, 2024. Taxpayers are now in a state of confusion regarding their obligations and are advised to consult legal and tax professionals to navigate this complex situation. It is essential to remember that tax obligations remain as long as one operates within the jurisdiction.

The outcome of this situation is uncertain. Some speculate that the absence of a current Finance Act could lead to uncertainty about applicable tax rates and government expenditures. Such a scenario could be chaotic, as the State’s operations are grounded in law. The case is likely to move to the Supreme Court, where the government may seek a stay order while attempting to address the identified legal issues.

As the country navigates these challenges, the Court of Appeal’s decision underscores the need for strict adherence to constitutional principles. Even if a stay is granted, public institutions must recognize that they are accountable for upholding the Constitution’s mandates. The Judiciary’s independence remains crucial in ensuring that each case is judged on its merits, reinforcing the rule of law.