Why retrospective application of tax laws is bad for the economy

Applying tax laws retrospectively is akin to time travel. Time travel, real or unreal, allows one to travel into the past.

Applying tax laws retrospectively means past actions which were unrestricted in law now become restricted or taxes which were not levied at the material time become due and payable.

Laws will often come into effect on the date stipulated by the legislature. Some laws may seek to remedy past actions like compensation for past human rights violations or serious crimes against humanity.

It would, however, be illegal for someone to be charged with a criminal offence which did not constitute an offence at the time it was committed. Should the country ban the use of non-electric taxis today, it would be illegal to charge taxi drivers who used non-electric taxis before the law came into place. Retrospectivity of the law is an exception, rather than the general rule. Laws should be forward looking.

In Kenya, laws come into force on the 14th day after their publication in the Gazette or on the date stipulated in the Act. The application of the Finance Act 2023 amended various taxation laws, whose application is according to the stipulated dates and not necessarily fourteen days after its publication in the gazette.

Notably, however, is that some provisions appear to have been applied retrospectively even when it was impossible to have complied with such provisions after the lifting of the suspension by the Court of Appeal.

For instance, taxpayers incurred late payment penalty and interest for failure to declare withholding tax within five working days for payments made between July 1 and 27 July 27 yet the Court of Appeal lifted the conservatory orders on July 28.

Retrospective tax laws may impose a tax or higher taxes where at the time the income was earned, lesser or no taxes were levied on the income.

One principle of taxation that shapes taxation systems is certainty. When taxpayers are certain about their tax obligations, they can do tax planning effectively, thereby enhancing compliance.

Certainty in tax also promotes investor confidence thereby increasing foreign direct investments. Taxpayers are entitled, rightly so, to plan their actions in accordance with the law in existence at the time they perform the action.

In 2020, the High Court declared the retrospective imposition of excise tax unconstitutional. The Kenya Bankers Association (KBA) filed a petition challenging the retrospective imposition of excise duty on money transfer services charged by banks.

Retrospective application of tax laws affects tax planning and compliance, investor confidence and generally the country’s economy. Certainty in tax laws is still a key principle in the formulation of tax policies.

Retrospective application of tax laws creates uncertainty. It is trite that judicial officers as well as legislators appreciate the impact of retrospective tax laws on the economy.

Deborah Moragwa is an Associate at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.