State governments forced to ignore court tax orders to raise revenue

The government seems unwilling to give up the billions of shillings it is to earn from tax measures introduced in the 2023 Finance Bill.

This is despite the Finance Bill 2024 being struck down amid public outcry, with the Court of Appeal ruling that the law was unconstitutional.

Since the implementation of the Act on July 1 last year, the Kenya Revenue Authority (KRA) has been unable to adjust its systems to reflect the reality as there were no previous tax measures implemented under the Act.

Meanwhile, the Energy and Petroleum Regulatory Authority (Epra) continues Determining oil prices Use the 16% VAT rate introduced in the Act last year.

The Finance Bill 2023 introduced measures such as doubling the VAT on fuel and increasing withholding tax (Paye) on high earners.

The government says it will lose about Sh164 billion in tax revenue every year if it stops collecting taxes set out in the 2023 Finance Bill.

It was in this backdrop that the agency sought a stay order from the Supreme Court, but the apex court rejected the plea and said it would expedite the case.

However, KRA is yet to tweak its system and repeal the tax measures introduced by the Finance Bill 2023 as no new bill was introduced this fiscal year.

The Federation of Kenya Employers (FKE) had questioned why the KRA had not adjusted its system to reflect the Court of Appeal’s decision.

FKE noted last week that KRA has yet to adjust its tax system to reflect the Court of Appeal’s ruling, adding that this has left its members and other taxpayers unable to pay taxes.

On August 9, the Kenya Revenue Authority sent a query to the All Kenya Trade Union. Jacqueline Mugo, executive director of the All Kenya Trade Union, said: “The All Kenya Revenue Authority deeply regrets that our member companies and indeed all taxpayers in Kenya are unable to pay taxes as per the judgment because the Kenya Revenue Authority has not yet configured its system to comply with the judgment of the Court of Appeal.”

“The purpose of this open letter is to request that KRA urgently provide clarity to Kenyan employers and all taxpayers on how they should pay their taxes in light of the Court of Appeal decision. We also note that today, August 9, 2024 is the last day to pay July 2024 taxes and our members may face penalties if KRA does not resolve this issue immediately.”

Last week, all eyes were on Epra to see how it would perform in Determining oil prices August-September pricing cycle.

The 2023 Finance Bill increased VAT on petroleum products from 8% to 16%, but even with the increased costs, the regulator reduced VAT on cooking gas to zero, bringing some relief to Kenyans.

Petrol prices are expected to be calculated based on the 8% VAT rate after the Court of Appeal ruled that a bill to increase the tax was unconstitutional.

The move was expected to significantly reduce fuel costs. However, Epra has adopted a 16% tax rate, seemingly defying the ruling.

However, the energy industry regulator said it was awaiting advice from the attorney general.

The same is true for road maintenance charges, the increase of which has been suspended by the Mombasa High Court, but the Environmental Protection Agency has yet to act on the suspension.

In early July, the Ministry of Transport increased the levy on road agencies for road repairs from 7 shillings per litre of super petrol and diesel to 25 shillings.

The price increase came into effect when Epra announced the prices for the July-August pricing cycle on July 14. On August 2, Mombasa resident George Odhiambo Juma filed a petition against the levy, arguing that the government had failed to involve Kenyans in the implementation of the levy.

this Last week’s court session The collection will be suspended until the case is heard and a ruling is made.

However, despite having the legal tools to review prices when such a situation occurs, Epra did not review fuel prices, in violation of the court order.

While Epra is required by law to publish fuel pump prices on the 14th of each month, it can issue an addendum if, for example, a court order occurs or a new law comes into effect.

On June 30 last year, Epra revised and proposed amendments to the maximum fuel prices published on June 14. In the revised appendix, Epra incorporated the increased VAT rate of the Finance Bill 2023, which came into effect on July 1.

However, this is not the first time Kenya’s kwanza system has defied the courts. The government has been at loggerheads with the judiciary on several occasions, and the judiciary has blocked several tax increases in the past, including last year’s affordable housing tax, which was also part of the 2023 finance bill.

VAT is currently 26 shillings per litre of petrol and 23 shillings per litre of diesel, and reducing it to 8% would mean a reduction of 13 shillings on super petrol and 11 shillings on diesel.

Combined with the suspension of the Sh7 road tax by the Mombasa High Court, this could mean Kenyans will enjoy a Sh20 per litre tax cut, at least until the two cases are heard and decided.

The Petroleum Marketers Association of Kenya (Poak) said on Wednesday that the industry was “eager to see VAT revised from 16 percent to 8 percent.”

The country’s lobby group for small and medium-sized oil marketers noted that the move would “significantly reduce oil prices”.

The fact that government agencies are standing by and continuing to collect taxes after the court ruling may be a sign of the difficult situation the country is in.

The 2023 Finance Act was ruled unconstitutional, which could lead to a funding shortfall of Sh164 billion if the Supreme Court upholds the ruling. In addition to this, the government is also grappling with the impact of the withdrawal of the 2024 Finance Bill following Generation Z protests across the country.

The government had expected the tax measures proposed in the bill to help increase tax revenue by 344.3 billion shillings, which will now likely be financed by more borrowing.

The government is currently implementing a new budget that contemplates addressing the issue of no fiscal bill this year by cutting overall spending as well as increasing the fiscal deficit.

In the supplementary budget, the Treasury cut the total budget by 3.1% from Sh3.99 trillion to Sh3.87 trillion.

The biggest change is a reduction of Sh122 billion in development spending, which is expected to affect new and ongoing development projects.

The fiscal deficit also increased from Sh597 billion (3.3% of GDP) to Sh761 billion (4.2% of GDP).

This will significantly impact domestic borrowing, which the Treasury expects to rise to Sh404.6 billion from Sh263.2 billion previously. The government expects to borrow the balance of Sh356.4 billion from foreign lenders.

Experts have recently suggested that the government may look for other ways to increase tax revenue in the coming months, including reviewing specific laws and raising taxes and levies separately, rather than reintroducing them in the Finance Bill. This is the case with the review of the road maintenance levy.

Different government officials have commented on this, with the new Finance Minister, John Mbadi, noting that there are some progressive parts in the 2024 Finance Bill that are good and he may try to retain them.

His boss, President William Ruto, during his tour of counties, noted how much money raised through the 2024 Finance Bill would bring in for infrastructure development across the country.

Ruto said there were plans to reintroduce some proposals, counting on flirting with the opposition to run into resistance in passing laws through parliament and possible protest fatigue among a “woke Generation Z” whose protests forced the bill to be withdrawn.

“We started the road construction project but along the way, we got stuck due to lack of funds. We planned well and allocated Sh130 billion in the budget but as you know, things went wrong and I hope the Kenyan people can understand that,” President Ruto told residents of Kakamega County on Saturday.

“Some people have been making a lot of noise until the budget was withdrawn. I’m telling our councillors now that we’re going to go back to the drawing board.”