The Kenyan High Court has ruled that the controversial housing levy introduced in 2023 is constitutional. This decision overturns a previous ruling from November 2023 that declared the levy illegal. The levy, which is set at 1.5% of the gross salary of all Kenyan taxpayers, is intended to fund an affordable housing programme. Employers are also required to contribute a matching amount.
Background and Controversy
The levy was initially introduced as part of the Finance Act 2023, which aimed to raise over $2.1 billion to help manage Kenya’s public debt of $78 billion. The Act introduced a series of tax increases on various goods and services, which, coupled with existing high inflation, caused hardship for many Kenyans. This led to widespread protests against President William Ruto’s government. Further protests, spearheaded by Gen-Z Kenyans, erupted in response to the Finance Act 2024, which included further tax hikes.
President Ruto has defended the housing fund, arguing that it will facilitate the construction of homes for low-income earners, generate employment opportunities, and reduce the need for government borrowing.
Legal Challenge and Court Ruling
A group of 22 senators, led by Busia’s Okiya Omtatah, filed six petitions challenging the legality of the housing levy. These petitions were later consolidated. The petitioners argued that the levy was discriminatory. However, a three-judge bench, consisting of Justices Olga Sewe, John Chigiti, and Josephine Mongare, ruled that the Housing Levy was properly enacted and aligned with the Constitution.
The court emphasized that the National Assembly and the Senate had sufficiently engaged stakeholders, ensuring adequate public participation. The court also rejected the petitioners’ claim that Section 4 of the Affordable Housing Act was discriminatory. They found that it did not infringe on Article 27 of the Constitution.
Implementation and Key Provisions of the Affordable Housing Act 2024
Following President Ruto’s signing of the Affordable Housing Bill 2023 into law on 19 March 2024, the Affordable Housing Act 2024 came into effect. The Kenya Revenue Authority (KRA) has been designated as the collecting agent for the levy. Employers are required to declare the levy on sheet ‘M’ of the Pay As You Earn (PAYE) return on iTax. Payments are to be made through KRA agent banks or via mobile money using the eCitizen Paybill number 222222.
The Act defines ‘affordable housing’ as housing that does not cost more than 30% of a person’s monthly income to rent or purchase. It also defines ‘institutional housing’ as housing suitable for public institutions such as universities, colleges, police and defence forces, government pool housing, and prisons.
Key provisions of the Act include:
- A 1.5% levy on the gross salary of employees or gross income of individuals not subject to the levy under gross salary.
- Exemption from the levy for employers who have contributed matching amounts to their employees’ deductions.
- A penalty of 3% of the unpaid amount for each month that the levy remains unpaid.
- Allowable deductions for employer contributions under Section 15 of the Income Tax Act.
- Affordable housing relief of 15% of contributions for resident individuals, capped at KES 108,000 per annum (KES 9,000 per month).
- Establishment of the Affordable Housing Fund, managed by the Affordable Housing Board.
- Eligibility criteria for housing allocation, prioritising marginalised persons, vulnerable groups, youth, women, and persons with disabilities.
- Provision for voluntary savings towards affordable housing units.
- Restrictions on the sale of affordable housing units without prior consent from the Board.
- Appointment of national government agencies and private institutions for the development of affordable housing units.
- Establishment of County Rural and Urban Affordable Housing Committees to advise on affordable housing programmes and develop five-year investment plans.
- Accountability measures for the Fund, including audits by the Auditor-General and penalties for misappropriation of funds or assets.
The Act came into effect on 19 March 2024, with Sections 4 and 5, which govern the levy’s imposition and collection, taking immediate effect. The remaining provisions are to be operationalised on a date determined by the Cabinet Secretary (Housing) through a gazette notice.
Concerns and Potential Challenges
While the Act aims to address the housing deficit in Kenya, some concerns remain. For instance, sole proprietorships and other entities without employees may face higher tax burdens on their gross income. Additionally, there is potential for double taxation on incomes like interest and dividends, as it may be difficult to determine if the recipient has already accounted for the levy through employee deductions.
The lack of a definition for ‘person’ in the Act could also lead to ambiguity. While the Interpretation and General Provisions Act defines a ‘person’ as including a corporate entity, this could potentially subject corporations to the levy.
The Act also fails to provide clear qualification criteria for exemptions from the levy, leaving this to be determined by future regulations. Furthermore, the delay in operationalising the affordable housing relief for employees may cause confusion and delays in implementation.
The restriction on the sale of affordable housing units without Board approval raises concerns about potential infringement on individual property rights. The transfer of all contributions previously held by the National Housing Corporation to the Fund is also contentious, given that the collection of the levy under Section 31B of the Employment Act was previously deemed unconstitutional.
Finally, the revocation of previous regulations regarding the affordable housing levy, including the definition of ‘gross pay’, may create uncertainties and require further clarification from the government. The lack of clarity regarding the treatment of non-cash and discretionary benefits may also pose challenges for employers.
Despite these concerns, the Affordable Housing Act 2024 represents a significant step towards addressing Kenya’s housing crisis. Its success will depend on effective implementation, transparency in the allocation of funds, and addressing the concerns raised by various stakeholders.
