The Kenya Finance Act 2023: Analysis, Implications, and Landmark Court Decisions
- Muhoro & Gitonga Associates
- Jan 23, 2024
- 6 min read
Updated: Oct 21
Table of Contents
Background to the Finance Act 2023
Key Highlights of the Finance Act 2023
3.2 Adjustments to Corporate Tax Rates
3.3 Enhanced Tax Compliance and Enforcement
3.4 Revisions to VAT Regulations
3.5 Incentives for Green Investments
3.6 Changes to Personal Income Tax
3.7 New Excise Duty Adjustments
3.8 Reforms on Capital Gains Tax
3.9 Expansion of Withholding Tax Regime
3.10 Electronic Tax Invoicing (eTIMS) ObligationsImplications for Businesses
Implications for the Wider Economy
Recent Judicial Developments on the Finance Act 2023
Key Lessons from Judicial Pronouncements
1. Introduction
The Kenya Finance Act 2023, assented to by the President on 26 June 2023, introduced far-reaching changes to the country’s fiscal and regulatory framework. It represented a major policy shift aimed at enhancing tax compliance, expanding the tax base, and raising revenue to support Kenya’s budgetary needs.
However, its implementation faced significant constitutional challenges, leading to landmark decisions by the Court of Appeal and ultimately the Supreme Court of Kenya in 2024. This article provides a comprehensive overview of the Finance Act 2023, its highlights, implications, and the critical judicial rulings that shaped its legitimacy.
2. Background to the Finance Act 2023
Every year, Parliament enacts a Finance Act to implement revenue-raising measures contained in the national budget. The Finance Act 2023 was unique for its aggressive expansion of Kenya’s tax regime, especially targeting the digital economy, green investments, and compliance measures.
While intended to address Kenya’s rising public debt and fiscal deficit, the Act sparked widespread debate due to its perceived heavy tax burden on businesses and households. The legal challenges that followed demonstrated the growing role of courts in safeguarding constitutional principles in fiscal policy.
3. Key Highlights of the Finance Act 2023
3.1 Digital Service Tax
The Act introduced a digital services tax (DST) targeting foreign and local companies offering online services in Kenya, such as streaming platforms, e-commerce businesses, and online marketplaces.
Implications:
For Service Providers: New reporting obligations and compliance costs.
For Consumers: Possible increase in subscription and product prices.
3.2 Adjustments to Corporate Tax Rates
The Act revised tax rates applicable to SMEs, large corporations, and repatriated profits, aiming to encourage investment while securing sustainable revenue.
Implications:
Corporates must re-evaluate tax planning strategies.
SMEs gain relatively favorable conditions, boosting entrepreneurship.
3.3 Enhanced Tax Compliance and Enforcement
The Act granted the Kenya Revenue Authority (KRA) expanded powers, including stricter penalties for late filing, improved audit systems, and enhanced enforcement against tax evasion.
Implications:
Businesses must invest in accurate accounting systems.
Higher compliance costs but better enforcement predictability.
3.4 Revisions to VAT Regulations
The Act adjusted VAT rates on several goods and services, particularly petroleum products and basic commodities.
Implications:
Businesses need to update VAT records.
Consumers face increased costs in fuel, energy, and essential items.
3.5 Incentives for Green Investments
The Act introduced tax deductions and exemptions for businesses investing in renewable energy, clean technologies, and sustainable practices.
Implications:
Encourages private sector investment in sustainability.
Supports Kenya’s climate commitments under the Paris Agreement.
3.6 Changes to Personal Income Tax
The Act revised income tax brackets, aiming to address equity concerns while raising additional revenue.
Implications:
Middle-income earners faced higher marginal tax rates.
Calls for better personal financial planning and restructuring of payroll systems.
3.7 New Excise Duty Adjustments
Excise duty was revised on items such as alcohol, tobacco, and mobile money transactions.
Implications:
Aimed at discouraging harmful consumption while raising revenue.
May disproportionately affect low-income households relying on mobile money.
3.8 Reforms on Capital Gains Tax
The Act expanded the capital gains tax (CGT) regime, targeting real estate transactions.
Implications:
Investors in property must factor CGT into returns.
Increases government oversight in emerging asset classes.
3.9 Expansion of Withholding Tax Regime
The scope of withholding tax was broadened to cover payments to non-resident contractors, digital service providers, and consultants.
Implications:
Increases upfront compliance requirements for businesses engaging foreign suppliers.
Provides a more efficient tax collection mechanism for KRA.
3.10 Electronic Tax Invoicing (eTIMS) Obligations
The Finance Act 2023 introduced mandatory compliance with electronic Tax Invoice Management System (eTIMS).
Implications:
All taxpayers must issue eTIMS-compliant invoices.
Enhances real-time tax monitoring by KRA.
4. Implications for Businesses
The Finance Act 2023 significantly increased administrative and compliance burdens for businesses. While offering incentives in some sectors (green investments), it also introduced additional taxes that raised operational costs. SMEs faced both opportunities (lower tax rates) and challenges (withholding obligations and VAT adjustments).
5. Implications for Individuals
For individuals, the Act reshaped personal income tax, excise duty on everyday items, and consumer pricing via VAT adjustments. Salaried employees and digital consumers bore the most immediate impact.
6. Implications for the Wider Economy
Economically, the Finance Act 2023 aimed to reduce reliance on external borrowing by enhancing domestic revenue. However, critics argued that higher taxes could slow down consumption, investment, and overall economic growth.
7. Recent Judicial Developments on the Finance Act 2023
7.1 Court of Appeal Decision: Unconstitutionality of the Act
In National Assembly & another v Okoiti & 55 others (Civil Appeal E003 of 2023 &. E016, E021, E049, E064 & E080 of 2024 (Consolidated)) [2024] KECA 876 (KLR) (31 July 2024) (Judgment), the Court of Appeal declared the Finance Act 2023 unconstitutional, citing:
Lack of adequate public participation.
Failure to provide legislative reasons for amendments.
Omission of revenue estimates in the Appropriation Act.
7.2 Supreme Court Decision: Validation of the Act
In Cabinet Secretary for the National Treasury & 4 Others v Okoiti & 52 Others; Bhatia (Amicus Curiae) (Petition E031, E032 & E033 of 2024) [2024] KESC 63 (KLR), the Supreme Court overturned the Court of Appeal, holding that:
Public participation requirements were substantially met.
Amendments after consultations did not require fresh public participation.
However, unrelated amendments (e.g., Kenya Roads Act changes) were unconstitutional.
This ruling reinstated the legitimacy of the Finance Act 2023.
8. Key Lessons from Judicial Pronouncements
Public Participation: Must be meaningful but not endless.
Legislative Process: Parliament must ensure transparency in revenue-raising measures.
Judicial Oversight: Courts remain a crucial check on fiscal laws.
9. Conclusion
The Finance Act 2023 represents one of the most impactful fiscal laws in Kenya’s recent history. It reshaped taxation, compliance, and investment incentives, while its constitutionality tested the resilience of Kenya’s democratic institutions.
With the Supreme Court’s validation, businesses and individuals must now adapt to the new obligations while seizing opportunities such as green investment incentives. Going forward, legislators must balance revenue needs, economic growth, and constitutional safeguards.
10. Frequently Asked Questions (FAQs)
Q1: What is the Kenya Finance Act 2023?
It is a law that implements Kenya’s annual budgetary revenue measures, introducing changes to taxation, compliance, and investment incentives.
Q2: Is the Finance Act 2023 still valid?
Yes. Although the Court of Appeal nullified it, the Supreme Court upheld its constitutionality in October 2024.
Q3: Who is affected by the Finance Act 2023?
Businesses, employees, consumers, and investors are all directly impacted through corporate tax, VAT, excise duty, and compliance obligations.
Q4: What is the Digital Service Tax introduced by the Act?
It is a tax on revenues earned by digital service providers operating in Kenya, such as streaming platforms and e-commerce sites.
Q5: What did the Supreme Court decide about public participation?
The Court held that the initial consultations were sufficient, and fresh public participation was not required for subsequent amendments.
Q6: How does the Act affect green investments?
It offers tax deductions and incentives for businesses investing in renewable energy and sustainable technologies.
Q7: What are the key compliance obligations for businesses?
Mandatory eTIMS invoicing, expanded withholding tax, stricter penalties for late filing, and enhanced audit requirements.
Q8: Are excise duties higher under the Finance Act 2023?
Yes. Duties increased on alcohol, tobacco, and mobile money transfers.
Q9: What are the implications of VAT revisions?
Businesses must adjust accounting systems, and consumers face price increases on key goods and services.
Q10: What lessons can policymakers learn from this Act?
The importance of transparency, meaningful public participation, and ensuring tax measures align with economic realities.
