The Court of Appeal has overturned a controversial High Court decision that deemed the Treasury’s income tax waivers unconstitutional.
In a landmark decision on December 30, 2024, the Court of Appeal quashed the High Court’s February 2023 ruling that declared the Income Tax Act’s provision on tax exemptions unlawful.
The court, however, clarified the legal standing of Section 13(2) of the Income Tax Act, affirming the Cabinet Secretary for National Treasury’s authority to grant tax exemptions through a legal notice.
The ruling, delivered in Civil Appeal E326 of 2023 consolidated with Civil Appeal E330 of 2023, upholds the legal foundation of Legal Notice No. 15/2021, which granted income tax exemptions to Japanese companies and their workers involved in key infrastructure projects in Kenya.
This decision has significant ramifications for foreign investments in the country, particularly those stemming from Japanese funding, which had previously been put into jeopardy due to the High Court’s ruling.
The Court of Appeal’s judgment restores the legality of tax exemptions granted through gazette notices, which had been issued under the authority of Section 13(2) of the Income Tax Act.
The original controversy stemmed from Legal Notice No. 15/2021, which was issued by the former Treasury Cabinet Secretary, Ukur Yatani, in February 2021.
This notice granted income tax exemptions to businesses, consultants, and workers involved in 16 projects funded by Japanese companies, valued at a staggering KES 328 billion.
The High Court’s February 2023 ruling in Constitutional Petition No. E280 of 2021 had declared Section 13(2) of the Income Tax Act unconstitutional, particularly its allowance for the Cabinet Secretary to grant tax waivers through a gazette notice
The Court argued that exemptions could only be granted by Parliament through legislation, as stipulated in Article 210 of the Constitution, which mandates that such tax exemptions be approved by the National Assembly following public participation and as a money bill.
The High Court’s ruling was based on the premise that the executive, through the Treasury, had overstepped its powers by bypassing the legislature in granting these exemptions.
This raised concerns about the legitimacy of various exemptions granted under similar circumstances, especially those benefiting foreign investors, such as the Japanese companies involved in multi-billion projects in Kenya.
However, the Court of Appeal, in its judgment delivered by Justices Daniel Musinga, Jesse Lesiit, and Lydia Achode, found the High Court’s decision to be flawed.
The appellate court concluded that the High Court had erred in declaring Section 13(2) unconstitutional and affirmed the constitutionality of the provision.
Justice Musinga, delivering the judgment, emphasized that “whilst Article 94(5) of the Constitution vests legislative authority in Parliament, such authority may, under express constitutional or legislative provisions, be delegated to other bodies.”
The Court found that Section 13(2) of the Income Tax Act expressly conferred upon the CS Treasury the power to grant tax exemptions, thus validating the actions of the Cabinet Secretary.
The Court further asserted that the High Court had made an error by deciding on an issue that was not part of the petition.
“The issue of the constitutionality of Section 13(2) was not pleaded before the High Court, and as such, there was no basis for the court to pronounce itself on it,” Justice Lesiit noted, quoting established principles that parties in a legal case are confined to the issues raised in their pleadings.
The Court of Appeal’s judgment is a significant legal victory for the CS Treasury, the National Assembly, and foreign investors benefiting from tax exemptions in Kenya.
In essence, the ruling restores the legal foundation of the tax exemptions granted through Legal Notices, particularly those benefiting Japanese companies involved in projects worth KES 328 billion in sectors such as infrastructure, energy, and manufacturing.
Justice Lesiit further clarified, “The powers of the CS Treasury to issue legal notices for tax exemptions are not in conflict with Article 210 of the Constitution. The exemptions granted by the CS for National Treasury are constitutional and have binding legal force.”
The judgment also dispels any ambiguity surrounding public participation in the granting of tax exemptions.
The Court affirmed that legal notices issued by the Treasury Cabinet Secretary are executive acts, not legislative instruments, and therefore do not require public participation.
This key ruling simplifies the process for granting exemptions and alleviates concerns over bureaucratic delays.
In its judgment, the Court of Appeal also considered the broader implications for future tax exemptions in Kenya.
Justice Achode noted, “Requiring each tax exemption to be passed by Parliament would paralyze critical national projects and overwhelm the legislature.”
This reinforces the idea that the delegation of authority to the Cabinet Secretary for National Treasury was meant to streamline the process, especially for projects involving foreign investments.
The decision further underscores the need for efficiency in processing tax exemption requests to support economic growth and investment in key sectors.
The decision by the Court of Appeal is an important legal milestone that ensures the continuity of tax exemptions crucial for Kenya’s development projects.
It also provides legal certainty for foreign companies that rely on such exemptions to operate in the country.
This includes the Japanese-funded projects that are central to Kenya’s infrastructure and development plans, which now proceed without the looming uncertainty caused by the High Court’s earlier decision.
While it remains to be seen whether the case will be taken to the Supreme Court, the Court of Appeal’s decision is expected to have a lasting impact on the country’s tax policy, particularly in terms of foreign investment incentives.
The ruling ensures that such tax exemptions are legally sound, bolstering investor confidence and facilitating Kenya’s ongoing development agenda.
For now, businesses and foreign investors can breathe easier, knowing that the tax exemptions granted by the Treasury through gazette notices are firmly grounded in law and will continue to play a vital role in the country’s economic progress.
