Fuel VAT Remains at 16% Despite Court Nullifying Finance Act 2023: Analyzing the Implications

Kenyans continue to grapple with high fuel prices as the Value Added Tax (VAT) on fuel remains at 16%, despite the Court of Appeal declaring the Finance Act 2023 unconstitutional. The Act, which had doubled the VAT on fuel from 8% to 16%, and introduced new tax bands in Pay As You Earn (PAYE) for high-income earners, was struck down by the court, leaving many anticipating an immediate reduction in fuel prices.

However, four days after the ruling, fuel prices at the pump have yet to reflect any changes. During a panel interview on Daybreak, Alex Kanyi, a partner at CDH Kenya—a firm specializing in legal advice on various matters including real estate, intellectual property, and data protection—explained that the delay in price adjustment could be attributed to the government’s need for interpretational guidance from the Attorney General. The challenge lies in the fact that Attorney General nominee Dorcas Oduor is yet to be approved by Parliament, leaving her unable to perform any official duties.

Kanyi elaborated on the situation, noting that the government might be awaiting mid-month when the Energy and Petroleum Regulatory Authority (EPRA) conducts its monthly review of fuel prices. He suggested that the government could announce the reduction in VAT on fuel during this review, thereby aligning with the court’s decision. “I’m not surprised with the petrol situation. For some reason, parliament does not effect the changes immediately and it’s not the first time,” Kanyi stated.

Furthermore, Kanyi pointed out that changes to the PAYE bands introduced in the Finance Act 2023 should also not be implemented in the next payslip. Instead, he advised that the tax rates prior to the Finance Act 2023 remain in effect. Before the enactment of the Finance Act 2023, the highest PAYE rate was 30%. The Finance Act 2023 had proposed a new band of 32.5% for individuals earning between Ksh.500,000 and Ksh.800,000 monthly, and 35% for those earning above Ksh.800,000. With the court ruling, employers are required to revert to the previous rates when processing payroll.

The court’s decision to nullify the Finance Act 2023 presents a significant challenge for the government, which relied on the Act to generate additional revenue to meet its budgetary expectations. Experts have posited that the government may revert to the Finance Act 2022 to fill the legislative void. However, questions remain regarding the adequacy of this move in addressing the looming revenue shortfall.

As the country awaits the Supreme Court’s final ruling on the appeal, the uncertainty persists. The Supreme Court’s decision will be crucial in determining the fiscal landscape and the implementation of tax laws. Meanwhile, Kenyans continue to bear the burden of high fuel prices, reflecting the broader challenges in the country’s tax and revenue collection systems.

The anticipation of a swift reduction in fuel prices following the court ruling has been met with disappointment, underscoring the complexities and procedural delays inherent in implementing judicial decisions. The Attorney General’s interpretational guidance, Parliament’s role in approving nominees, and the timing of regulatory reviews all play critical roles in this intricate process.

In conclusion, the nullification of the Finance Act 2023 by the Court of Appeal has set off a chain of events and procedural considerations that delay immediate relief for Kenyans. The government’s next steps, the role of the Supreme Court, and the ultimate impact on the country’s fiscal policy remain to be seen, as citizens eagerly await tangible changes at the pump and in their payrolls.