How KRA exploits clashing court rulings to hit you as a taxpayers with backdated charges

The dilemma faced by taxpayers following the removal of court orders that suspended the enactment of the Finance Act 2023 is whether the recently introduced tax changes will be applicable starting from July 1, when most of the Act's provisions took effect, or from July 28, when the orders were lifted by the Court of Appeal.

To provide some context, the Finance Act 2023 was officially published on June 26, introducing a wide range of significant tax modifications that were scheduled to take effect on different dates: July 1, September 1, and January 1, 2024.

Tax Targets

(Sh trn)

2022/23

2.19

2023/24

2.57

2024/25

2.88

2025/26

3.29

2026/27

3.78

The government is hoping to raise tax revenue to Sh3.78 trillion annually in four years.

Source: Treasury

Among the noteworthy changes set to occur on July 1 were the new Pay as You Earn (PAYE) rates for individuals and the contentious affordable housing levy, which would impose a 1.5 percent rate on employee gross pay, matched by employers. Additionally, this date marked the increase in VAT on petroleum products from eight percent to 16 percent and the obligation for withholding and withholding VAT taxes to be remitted within five working days.

Breakdown of ordinary revenue target FY2023/24

The government is hoping to raise tax revenue to Sh3.78 trillion annually in four years.

Source: Treasury

Typically, businesses and employers would have implemented these new tax provisions starting on July 1. However, shortly after the Finance Act 2023's publication, a petition was submitted by Okiya Omtatah and others, leading the High Court to issue conservatory orders halting the implementation of the Act. These orders were upheld until the resolution of the Omtatah petition.

Conservatory orders aim to ensure that the subject matter, once fully determined, doesn't render the decision ineffective due to already implemented changes. To receive these orders, an applicant must show a strong case with a likelihood of success.

In an unexpected turn of events, the government appealed against these orders, resulting in the Court of Appeal lifting them on July 28, thereby allowing the Finance Act 2023 to be enforced.

Now, the predicament for Kenyan employers and businesses lies in deciding the appropriate course of action. Should taxpayers consider the conservatory orders issued by the High Court irrelevant, leading to the conclusion that the new taxes should have been implemented from July 1, even though the conservatory orders were in effect?

Alternatively, should the taxes be considered applicable starting from July 28, when the Court of Appeal rescinded the conservatory orders?

This matter is further complicated by the Kenya Revenue Authority's (KRA) expectation that employers remit the affordable housing levy, an expectation not met by most employers in July 2023.

The KRA released a statement on August 3 stating that the new PAYE rates were implemented on iTax from July 1, 2023, and the PAYE (P10) return process had been adjusted to include the administration of the Affordable Housing Levy. The Ministry of Lands, Public Works, Housing, and Urban Development also confirmed the commencement of the affordable housing levy on July 1.

Prior legal cases in Kenya, like the Stanbic Bank Limited case and the Association of Kenya Insurers case, have shaped the interpretation of the impact of conservatory orders. These cases underscore the importance of obeying court orders and provide divergent perspectives on whether taxes affected by conservatory orders can be collected retrospectively.

In light of this, the resolution of the Omtatah case by a three-judge bench, appointed by Chief Justice Martha Koome, is anticipated to provide clear guidance on the effects of conservatory orders, not only for the present situation but also for future occurrences.

Meanwhile, given the KRA's updates on iTax regarding new PAYE rates and the Affordable Housing Levy, many employers might opt for a cautious approach, remitting taxes for the entire month of July 2023 based on the newly adjusted rates.