Attorney General Tells KRA to Halts Collection of Contested Housing Tax

The Kenyan government’s ambitious affordable housing program faces a significant roadblock as the Court of Appeal declared the mandatory housing levy illegal on January 26, 2024.

This levy, which required both employers and employees to contribute 1.5% of their gross salary towards affordable housing initiatives, has been a central pillar of the government’s funding strategy for the program. In response to the Court’s decision, Attorney-General Justin Muturi issued a letter on February 12th, informing the Kenya Revenue Authority (KRA) to cease collecting the levy due to its lack of legal basis following the ruling. This directive underscores the potential financial risks the government faces if the levy remains invalidated.

According to the Parliamentary Budget Office (PBO), employers and employees had contributed a total of Sh26.8 billion to the levy as of December 2023. However, the ongoing legal challenges could jeopardize the program’s future funding. The government initially aimed to collect a total of Sh26.8 billion by June 2024, and was on track to achieve 85% of this target, averaging Sh4.47 billion monthly.

The legal complexities surrounding the levy stem from its contested constitutionality. In November 2023, the High Court initially declared the levy unconstitutional, although it allowed temporary collection pending an appeal. However, the Court of Appeal’s subsequent ruling in January 2024 effectively halted further collections. The government plans to challenge this decision in the Supreme Court of Kenya, hoping to ultimately secure the levy’s legality.

Additionally, the PBO has identified potential legal risks associated with the Affordable Housing Bill 2023. The PBO’s analysis highlights key gaps in the bill, raising concerns about the government’s vulnerability to legal challenges regarding existing contracts entered into with developers based on anticipated levy funding.

“If the current status is not addressed and the levy remains nullified, the government will be exposed to fiduciary risks due to the contractual obligations it has already entered with property developers for the ongoing projects since its exchequer funding is constrained,” says PBO.

Earlier this month, AG Muturi called on Parliament to modify the disputed Housing Bill to benefit ordinary citizens. Muturi made this request after his appearance before the joint committees of Finance and Planning and Housing and Urban Planning. He emphasized that the bill also impacts counties, contradicting the viewpoint of majority leader Kimani Ichungwa. Muturi assured the committee that the concerns raised by the courts regarding the Housing Levy have been addressed in the proposed bill. However, he encouraged the committee to further improve the bill, as they have the authority to do so.