Detailed discussion

On 20 August 2024, the Supreme Court of Kenya (Supreme Court) issued conservatory orders suspending the judgment delivered by the Court of Appeal on 31 July 2024, which declared the Finance Act, 2023 (the Act) unconstitutional.

For more on the Court of Appeal decision, see EY Global Tax Alert, Kenya Court of Appeal declares the Finance Act, 2023 unconstitutional one year later, dated 5 August 2024.

Following the judgment, three parties filed appeals at the Supreme Court challenging the decision, alongside applications seeking orders to stay the judgment of the Court of Appeal pending the hearing and determination of the appeal. The Supreme Court has now issued its ruling on the applications for stay.

Applicant's arguments

The Applicants advanced the following arguments to support their application:

1. The Court of Appeal erred in misunderstanding the procedures for enactment of money bills under the Constitution and the Public Finance Management Act.
2. The Court of Appeal contradicted its own previous decisions on the threshold for public participation required in enacting statutes.
3. The impugned decision created an untenable situation in which the government would have to revert to the Finance Act, 2022 for revenue collection.
4. Nullification of the Act would result in a revenue shortfall of KES¹ 214b, which would be irrecoverable unless the stay orders are granted; the government might have to borrow funds to meet its obligations, thus increasing public debt and inflation.
5. The judgment would also require cost-intensive "updating" of online platforms, revenue collection software and systems to relevant tax rates for various items to comply with the legal regime that existed in 2022.
6. Following the rejection of the Finance Bill 2024 (on 26 June 2024), a similar bill cannot be reintroduced in the National Assembly until the expiry of six months from the date of such rejection. (For background, see EY Global Tax Alert, Kenya's President declines to assent to the Finance Bill 2024, dated 3 July 2024.)
7. The consolidated appeals' significance to public interest warrants the issuance of the stay orders.

Respondent's arguments

Opposing the application, the Respondents argued that:

1. Granting the orders sought would be against public interest as this would mean that Kenyans would be subject to unconstitutional taxes for a longer period.
2. The applicants' argument about the revenue shortfall and further fiscal deficit for the government if the orders were not granted lacks merit because the Government had already demonstrated it can adjust public expenditures to accommodate any financial gap. Further, revenue collection is dependent on the substantive tax legislation currently in force and not on the Finance Act.
3. Article 208 of the Constitution establishes a Contingency Fund for emergencies or unforeseen eventualities and therefore the government is not handicapped in meeting its fiscal obligations.
4. Because two superior courts had found the Act, or some of its provisions, unconstitutional, the applicants ought not to obtain the interim relief sought.
5. Issuance of the orders sought would be akin to violating the provisions of the Constitution and rewarding the applicants for violation of the Constitution.
6. The applicants had not demonstrated the existence of any legal vacuum or justification to warrant the suspension of the declaration of invalidity of the Act.

Supreme Court determination

In issuing its decision, the Supreme Court considered three main principles that ought to be satisfied or demonstrated to warrant granting of an order of stay. These are that:

1. The appeal or intended appeal is arguable and not frivolous.
2. Unless the order of stay is granted, the appeal or intended appeal, were it to eventually succeed, would be rendered nugatory.
3. It is in the public interest that the order of stay be granted.

The Supreme Court opined that the appellants had satisfied the three elements to justify granting of the orders sought and therefore proceeded to stay the execution of the judgment of the Court of Appeal pending the hearing of the main appeal.

Implications

The stay orders issued by the Supreme Court reinstate the operation of the Act pending the hearing and determination of the substantive appeal, which will determine whether the Act is indeed unconstitutional. Taxpayers should therefore continue applying the provisions of the Act.

Due to public interest, the Court has directed that the consolidated appeal will be heard on 10 and 11 September 2024.