Under the previous regime, for example, the Government aimed to build 500,000 affordable new housing units and to subsequently reduce the low-income housing gap by 60%. Currently, housing and settlement constitutes one of the core pillars of the Government’s Bottom-Up Economic Transformation Agenda (BETA). BETA seeks to increase the supply of new housing units to 250,000 per year and bolster the percentage of affordable housing supply from 2% to 50%.

It is against this background that the Finance Bill, 2023 (Bill) proposed an amendment to the Employment Act to provide for remittance of deductions into the National Housing Development Fund (Fund). The intention of the Bill was to mandate employers to remit to the Fund: an employer’s contribution at the rate of 3% of an employee’s monthly basic salary and the employee’s contribution at the same rate. The sum of both the employer and employee contributions was, however, capped at KES 5,000 per month. The Bill had further proposed an array of benefits such as the use of the contributions to purchase homes under the affordable housing scheme for eligible employees. For the ineligible ones, they could transfer the contributions to a retirement benefits scheme or to their spouses/dependent children or to any person registered and eligible for affordable housing.

The Bill was assigned to the Departmental Committee on Finance and National Planning (Committee) for consideration of stakeholder submissions on 4 May 2023. Despite numerous concerns by stakeholders about the contributions to the Fund, the Committee did not do away with the proposal but instead made suggestions in its report for the rate to be reduced from 3% to 1,5%; for it to be made a levy instead of a mandatory contribution; and for the cap of KES 5,000 to be removed. Additionally, the benefits that had been proposed by the Bill to accrue to employees who are not eligible for affordable housing after seven years or attainment of the retirement age were removed. These included: the transfer of their contributions to a retirement benefits scheme or pension scheme registered with the Retirement Benefits Authority; a transfer of their contributions to any person registered and eligible for affordable housing; a transfer of their contributions to their spouse/dependent children; or to receive their contributions later in cash. The Committee’s suggestion was adopted by the National Assembly and passed into law when the president assented to the Bill on 26 June 2023.

Recent court cases on Finance Act, 2023

The Bill became an Act upon the presidential assent. A few public interest litigants filed Petition No. E181 of 2023 (petition) at the High Court seeking to declare the Finance Act, 2023 (Act) unconstitutional on grounds that its enactment was contrary to the dictates of both the Constitution and the Public Finance Management Act, 2012. The applicants successfully obtained conservatory orders suspending the implementation of the Finance Act, 2023. It was the court’s verdict that there was a need to preserve the substratum of the petition and prevent the imminent danger of it being rendered nugatory. For a while afterwards, the provisions of the Act could not come into force despite the Government’s ambitious tax revenue targets of KES 210 billion from measures introduced in Finance Act, 2023 and the 2023/24 budget of KES 3,6 trillion.

On 11 July 2023, the Cabinet Secretary for National Treasury and Planning and the Attorney General made an application to the Court of Appeal to overturn and lift the orders issued by the High Court. After listening to both sides, the appellate court lifted the High Court’s conservatory orders that had suspended implementation of the Act. The court’s decision considered several factors and circumstances. First, it appreciated that members of the public could always get rebates/refunds for overpaid taxes when making subsequent tax payments. Secondly, it recognised that the applicants’ application for a stay of the High Court orders had met the requisite threshold for the issuance of such orders. Furthermore, the court factored in public interest considerations and expressed hesitancy towards suspending the whole Act while underscoring that only specific provisions whose implementation have an irreversible effect ought to be suspended.

Implications of the Affordable Housing Levy

The provisions in the Finance Act, 2023 on contributions for the Affordable Housing Levy took effect on 1 July 2023. Section 31B, which has been introduced by the Act to the Employment Act requires employers to deduct and remit an Affordable Housing Levy as follows:

• 1,5% of the employee’s gross monthly salary for the employee; and
• 1,5% of an employee’s gross monthly salary for the employer.

Section 31C of the Employment Act further states that the levy is to be remitted not later than nine working days after the end of the month in which the payments are due. Section 31C (2) imposes a penalty on any employer who fails to comply with the remittance requirement timelines. It provides that such a failure attracts a liability to a penalty of 2% of the unpaid funds for each month that the payment remains unpaid.

Notably, unlike the Finance Bill that had a cap of KES 5,000, there is no such provision in the Finance Act, meaning that employees and employers will contribute more than what was initially envisaged in the Bill. It is however imperative for employers to actively remit the funds on a monthly basis and avoid unnecessary penalties.

The intention and purpose of the levy is stipulated in the newly introduced section 31B (2) of the Employment Act. According to this section, the levy will be utilised in providing funds for the development of affordable housing and associated social and physical infrastructure as well as the provision of affordable home financing to Kenyans. The Act is categorical that the levy shall not be used for any purpose other than the intended one.

Way forward

On 3 August 2023, the State Department for Housing and Urban Development issued a public notice to the effect that the Cabinet Secretary, Ministry of Lands, Public Works, Housing and Urban Development has appointed the Kenya Revenue Authority (KRA) as its collection agent for the Affordable Housing Levy. The Government has also backdated the deductions to 1 July 2023. KRA subsequently issued a notice to reiterate the effective date for the levy and clarify that the employer’s contribution is a tax-deductible expense. 

The notice from the state department and from the KRA may have come after employers had already paid July salaries. There is still a chance for employers to remit the levy in August when accounting for July’s pay-as-you-earn (PAYE) tax. Those employers may have to recover the employee’s portion of the levy from the next salaries. For employers who had already filed the return, they can file an amended return.

Questions still abound on the housing levy, including the definition of “gross salary” as this is not defined in the Finance Act, 2023, Income Tax Act or the Employment Act. It is not clear whether the levy applies to basic salaries and allowances and all non-cash benefits. It is also not clear whether the levy applies to lump sum payments such as bonuses and terminal dues. The KRA and the relevant state department are likely to adopt a broad definition that maximizes the contributions. We, however, expect that the state department and KRA will issue guidelines to respond to such questions and others that may come along.

Meanwhile, in its latest Business Transformation Notice, the KRA has made some enhancements in light of the changes brought by the Finance Act, 2023. In the notice, KRA states that the PAYE (P10) return has been enhanced to update the sheet “Affordable Housing Levy_dtls” for purposes of administering the levy. Additionally, the payment registration module under the iTax platform has been modified to enable taxpayers to generate a payment slip by selecting “Tax Head” as “Agency Revenue” and “Tax Sub Head” as “Housing Levy”. Most importantly, the payment slip will be generated separately from that of PAYE and other payroll levies.

Going forward, employees must now be aware that the levy has taken effect. Likewise, employers must remit the levy to the KRA in time to avoid penalties. The substantive case challenging the constitutionality of the Finance Act, 2023 will meanwhile continue at the High Court to its final determination.