Court to rule on Finance Act as state plan tax arrears in August pay

The Court of Appeal is set to issue its judgment today Friday, 28th July following a petition filed by Treasury Cabinet Secretary Njuguna Ndung’u seeking to have the orders barring implementation of the revenue-raising law lifted.

The Kenya Revenue Authority (KRA) has revealed plans to backdate the taxes it hasn’t collected during the suspension of the controversial Finance Act 2023 should the High Court lift the freeze order in what promises to be a double blow to teachers and other salaried workers who had escaped the July deductions.

Lifting the orders would mean provisions with a July 1, 2023 effective date such as the introduction of a housing tax deduction at 1.5 percent of gross pay matched by another 1.5 percent from the employer would now be implemented and applied retrospectively.

“All officers are advised to read this circular and the specific provisions of Finance Act 2023. Further, officers are advised that the provisions of the Act shall come into effect on the dates specified in Section 1 of the Act. The Act provides the following effective dates July 1, 2023; September 1, 2023; and January 1st, 2024,” an internal memo circulated among KRA staff says.

Teachers have received their July salaries but the 1.5% housing tax was not factored. However they had more deductions coming from the newly introduced sh. 360 National Social Security Fund (NSSF) and the revised 2.5% National Health Insurance Fund (NHIF).

Should the Court lift the orders suspending the Act, teachers will face tax deduction in their August salaries backed to July 1st.

Teachers are also expecting a salary increment with arrears in August backdated from July 1st.

On June 30, President Ruto announced that teachers and other civil servants would receive their increased salaries from this July but this did not happen because the Salaries and Remuneration Commission (SRC) is not through working it out.

Ruto had ordered SRC to pay a salary increment of between 7% and 10% starting from 1st July to all public servants to cushion them from the high cost of living.

SRC is currently working on the review after concluding the public participation exercise three weeks ago.

The commission will then gazette the new salaries so that government departments responsible for paying civil servants and teachers can implement the increase.

Another provision that would present a shocker to Kenyan workers would be the introduction of the 32.5 percent tax rate for persons earning between Sh500,000 and Sh800,000 monthly and the 35.0 percent tax rate for persons earning above Sh800,000 monthly.

Retrospective application means that the taxman will still be entitled to collect the July shortfall in the next payroll in August since the July 2023 payroll has already been processed by the time such orders are lifted.

The KRA has asked its officials to have systems ready to effect the changes should the prevailing orders be lifted.

“The Finance Bill 2023 was assented into law on June 26, 2023. As you may be aware, the High Court issued orders on June 30, 2023, suspending the implementation of Finance Act 2023,” the internal memo says.

“Until such orders are lifted or varied, we may not legally implement the contents of this Act. Subject to the directions of the courts, the ICT division should work closely with the revenue departments to ensure that the system is ready to support the implementation of the Act.”

For instance, should the orders be lifted, persons with a gross salary of Sh600,000 per month will have their take-home pay reduced by Sh11,473 to Sh413,943 owing to the changes brought about by the new tax rate of 32.5 percent for pay as well as the introduction of the housing tax at 1.5 percent of gross pay.

Kenyans who earn Sh800,000 per month will see their net pay reduce from Sh565,416 to Sh548,988 after the new housing tax and the 35.0 percent tax rate is enforced.

The Federation of Kenya Employers (FKE) said that employers were processing July 2023 payrolls based on the provisions of the Finance Act of 2022 pending guidance from the courts.

“The conservatory orders mean that nothing changes for now. We manage payrolls and calculate statutory deductions as we have always done until and unless the courts rule otherwise,” FKE executive director Jacqueline Mugo said.

The High Court issued the orders barring implementation of the Finance Act 2023 on June 30 before asking Chief Justice Martha Koome to constitute a three-judge bench to hear the petition filed against the Kenya Kwanza government’s debut revenue-raising plan.

The Chief Justice has since constituted the bench comprising Justices David Majanja, Lawrence Mogambi and Christine Meoli to hear the petition.