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In June 2023, the Finance Act of 2023 (the Act) brought significant changes to Kenya’s taxation statutes. However, the Act faced a suspension due to a constitutional petition, causing uncertainty for taxpayers. A Court of Appeal ruling on 28 July 2023 has now lifted the conservatory orders suspending the implementation of the Finance Act, and the Finance Act is therefore deemed to have been effective from 1 July 2023. Taxpayers must now consider immediate actions and implications.
We recently published a legal alert on the Act, summarising the key highlights of the amendments introduced to various taxation statutes in Kenya. The amendments were stated to enter into force on various dates i.e., on 1 July 2023, 1 September 2023 or 1 January 2024.
Employment matters: With respect to employment related matters, the Finance Act proposed two major amendments that were to take effect as from 1 July 2023, as follows:
Withholding Tax and Withholding VAT remittance due dates: The Finance Act also amended the Withholding Tax (WHT) and Withholding VAT (WHVAT) obligations for persons making payments that are subject to WHT and where WHVAT obligations are applicable. Previously, WHT and WHVAT that was deducted from applicable payments were due to the Kenya Revenue Authority (KRA) on the 20th day of the month following the month in which the deduction was made. However, the Finance Act now requires that the deducted amounts be remitted to the KRA on the 5th working day after the deduction is made. Similar provisions exist in respect of excise duty and rental income tax deducted by an agent.
Suspension of the Finance Act
The Finance Act was suspended on account of orders granted by the High Court under an application dated 29 June 2023 that was filed in the constitutional petition of Okiya Omtatah Okoiti & 4 others v The Cabinet Secretary for the National Treasury and Planning & 2 others, Petition No. E181 of 2023 (the Petition). The application by the Petitioners had sought for conservatory orders suspending the Finance Act pending the hearing and determination of the Petition, and the High Court agreed with the applicants that the conservatory orders were necessary to preserve the subject matter of the Petition.
In response to these orders, the Respondents in the Petition lodged an appeal with the Court of Appeal, which issued its ruling on Friday, 28 July 2023. The Court’s decision lifted the conservatory orders that suspended the Finance Act, effectively reinstating its effect from 1 July 2023, while the Petition continues to be under consideration at the High Court.
Conundrum for Employers in Kenya
Taxpayers and particularly employers, have been placed between a rock and a hard place as it has been unclear in light of the suspension whether they should have processed their July payroll under the previous rates (where the maximum tax rate was 30%) or whether they should have implemented the new rates in the Finance Act. This is to be considered against the fact that under the Income Tax Act, it is the employer who has the responsibility to deduct the tax payable from the employees’ salaries on each payday and remit the tax to the KRA by the 9th day of the subsequent month. Where the employer fails to deduct the tax as required by law, they will be held liable for unpaid tax and subjected to penalties and late payment interest amounts.
From experience, we have seen the KRA seek to collect back taxes in such cases where court orders were lifted or reversed subsequently to the effect of deeming the impugned taxes as due. We have not come across a judicial interpretation that provides practical guidance on what should happen in such cases where taxpayers comply with a court order that is subsequently overturned by higher courts against the taxpayers’ position. However, in the matter of the retrospective application of the law, particularly in relation to the provisions contained in the Finance Act of 2018 in the case of Kenya Bankers Association v Attorney General and another, Petition No. 353 of 2018, the KRA argued that the Constitution of Kenya, 2010 (the Constitution) at Article 116 permits an enacted law to apply retrospectively. The High Court in its analysis however, held that its interpretation of that Article is that legislation passed by Parliament ought to apply prospectively unless expressly stated within the document that it should apply retrospectively.
An additional concern where the previous tax rates were used for July salary payments will be that when employees are filing their tax returns for the 2023 year of income, they will find that the iTax system will show a tax underpayment, as the system will reflect that the new PAYE rates took effect as from 1 July 2023.
The Finance Act also introduced the new Affordable Housing Levy (the Levy) which is aimed at pooling funds for the development of affordable housing and the provision of affordable home financing to Kenyans. The Levy is deductible at the rate of 1.5% by the employee, with a matched contribution of 1.5% by the employer on the gross monthly salary of the employee. Similar to employment tax, the employer has the obligation to make both the employer’s and employee’s deductions and remit the same to the fund on the 9th working day of the following month following the month in which the deduction was made. The Levy also had the effective date of 1 July 2023 and therefore, it is expected that the deduction of the Levy should be implemented in the July payroll. The Finance Act provides that an employer who fails to comply shall be liable to a penalty equivalent to 2% of the unpaid funds for every month the same remains unpaid.
We caution employers that, noting the responsibility posed on them to collect employment taxes and the Levy, there is a risk that with the lifting of the conservatory orders, employers could be subjected to penalties even though they were in compliance of the same court orders. Additionally, if the amounts are not paid, the iTax system will nonetheless show a tax underpayment on the part of employees when filing their annual tax returns for the 2023 year of income.
Employers who had already processed their payroll earlier in July and therefore applied the previous PAYE rates should consider seeking employment law advice on whether it would be acceptable under employment law to claim the deficit from subsequent month’s salary payments as a deduction from the employees’ salaries. The alternative would be for the employers to foot the deficit to ensure that they remain compliant with the provisions of the Income Tax Act (as amended by the Finance Act).
In relation to the WHT obligations, it should be noted that the new requirement to remit WHT on the 5th working day will now apply with respect to all forms of WHT including payments on account of interest, dividends, management, and professional fees amongst others. Therefore, taxpayers will be required to configure their systems to ensure that they are compliant with the timelines noting that the first WHT payments under this new regime will be due in the coming week. The same issue should be noted in respect of WHVAT, excise duty and rental income tax, wherever applicable.