Background

Through a judgement dated 30th January 2023, dismissing Constitutional Petitions E338 of 2022 as consolidated with Petitions E342 of 2022, 372 of 2022, 373 of 2022 and E407 of 2022, the High Court determined that the additions brought in to the Finance Act 2022 were lawfully done so and do indeed form part of the laws of Kenya.

The Petitioners had challenged several provisions introduced in the Finance Act 2022. These provisions included the deletion of Paragraph 32 of the First Schedule of the VAT Act, which exempted the export of taxable services from VAT and the introduction of excise duty on imported ready to use SIM cards at KES 50 per SIM card as well as excise duty on the other fees charged by digital lenders at 20%.  

The Petitioners relied on the grounds that these new additions were not subject to public participation, were against established principles of tax law and international best practices and would place unfair and undue hardship on Kenyan citizens.

Main Issues

The main issues in the suit are as summarized below:

  1. Whether the Petitions invoke the principle of sub judice; 
  2. Whether the Finance Act 2022 and the impugned sections were subject to public participation and if so, whether they are constitutional; and
  3. Whether the imposition of the impugned taxes by the National Assembly was unconstitutional.

Court’s Analysis and Determination

Issue 1: Whether the Petitions invoke the principle of sub judice

The Petitioners claimed that there were currently several suits pending before the High Court, touching on the issue of increase of Excise Duty rates.

The sub judice principle provides that where the same parties have filed multiple suits regarding the same subject matter, proceedings and orders in all subsequent suits are stayed pending the determination of the primary suit.   

In this petition, the Court held that the sub judice principle cannot apply, since the previous suit, (still ongoing), did not correlate with the subject matter of the instant petition. 

Issue 2: Whether the Finance Act 2022 and the impugned sections were subject to public participation and if so, whether they are constitutional

The Finance Act 2022 introduced several new provisions that were not under consideration in the Finance Bill 2022. Some of the provisions included the deletion of Paragraph 32 of the First Schedule of the VAT Act, which exempted the export of taxable services and the introduction of excise duty on imported ready to use SIM cards at KES 50 per SIM card and excise duty on the other fees charged by digital lenders at 20%.

It was the Petitioners case that these provisions were never proposed in the Finance Bill 2022 and therefore not subject to public participation.

It was not in dispute that the Finance Bill 2022 was widely submitted on by various stakeholders, prior to being tabled before the National Assembly.

It was the Court’s determination that the parameters of the Finance Bill 2022 were to determine the means and methods of revenue collection by the Government and the administration of tax laws. The Court therefore held that even though these provisions were not included in the Finance Bill 2022, they fall within the parameters of the Bill to raise revenue and therefore, any amendments introduced by the National Assembly did not violate the principle of public participation, provided that the amendments fell within the parameters of the Bill. The Court was of the view that if every subsequent amendment was subjected to public participation, it would negate and undermine the legislative process.

Issue 3: Whether the imposition of the impugned taxes by the National Assembly was unconstitutional

It was the Petitioner’s case that the impugned amendments were unconstitutional due to their burdensome and oppressive nature, which is not in line with the principles of public finance envisaged under Article 201 of the Constitution.

Furthermore, the Petitioners argued that charging VAT on exported services would amount to double taxation. This is because the global practice is that the destination principle should be applied to the chargeability of VAT, where the taxing right is in the country where the service is consumed, as opposed to the origin principle, where the taxing right is in the country where the service is produced. It is important to note that the origin principle goes against international best practice and Organization for Economic Co-operation and Development (OECD) Guidelines.

The Petitioners also argued that the increase in Excise Duty on alcoholic beverages and introduction of the same on other fees charged by digital lenders as well as on imported SIM cards would lead to undue hardship suffered by the consumers. The Petitioners further argued that introducing excise duty on “other fees” charged by digital lenders is discriminatory against digital lenders compared to other financial institutions.

The Court held that the National Assembly was conferred with powers under the Constitution to impose taxes as it deems fit. It is the role of the National Assembly to determine the rates and types of taxes it can impose. Furthermore, the decision to use the origin principle was the prerogative of the National Assembly. The Court could therefore not make a determination on the same, as it would amount to a violation of the doctrine of separation of powers. The Court also held that the discrimination alleged to by the Petitioners was merely speculative and no evidence was placed before the Court to ascertain the claim.

Conclusion

The decision of the Court to dismiss the petitions means that:

  • Exported services are subject to VAT at 16% with effect from 1 July 2022;
  • Excise duty at 20% on “other fees” charged by digital lenders is effective from 1 July 2022;
  • Excise duty on imported and ready to use SIM cards at KES 50 per SIM card is also effective from 1 July 2022