The High Court on Monday struck out new taxes imposed on non-alcoholic beverages, food supplements and beauty products.
Justice John Mativo's decision to revoke the legal notice by Treasury Cabinet Secretary Henry Rotich means the Government will not collect the Sh4.7 billion it anticipated from these products.
It was also a win for the beauty industry following the High Court declaration that the law gazetted by Mr Rotich imposing taxes on cosmetics was unconstitutional.
The judge said Treasury's push was unlawful, citing lack of public participation in levying the new taxes and irregularity in awarding a tender for the Excise Goods Management System (EGMS).
Rotich intended that Kenya Revenue Authority (KRA) would collect Sh3.8 billion in the new levies on non-alcoholic beverages and food supplements.
Close to Sh900 million was to be netted by 10 per cent tax on lipsticks, hair oils and nail polish among other beauty products.
The court found that the CS had erred by calling two boardroom meetings and assuming them to be public participation.
Rotich told the court he had invited the Kenya Association of Manufactures to air their views on the levies.
In court, he produced only a list of those who attended the meetings but did not have minutes on what was discussed.
But the association denied this, saying they were caught by surprise when the CS announced the same in the media.
The court heard that Rotich crafted the proposals in 2013 and tabled them in Parliament but he did not appear before the House to defend them.
He went ahead to gazette the notice on assumption that since Parliament’s Committee on Delegated Legislation did not get back to him within 28 days, the members were satisfied with what he had tabled.
Also affected by Mativo’s ruling is a five-year deal worth Sh17 billion between KRA and a Swiss security firm, SICPA Securities SOL SA, to run the EGMS.
The system was expected to bolster tax collection by 17.7 per cent and at the same time weed out sub-standard and adulterated products from the market.
The judge quashed the tender because KRA opted for single-sourced SICPA services instead of seeking competitive bids from different companies.
In court, KRA did not explain why it did not advertise the tender, but insisted that it was an extension of another one that had been issued to the same firm.
The case was filed by activist Okiya Omtatah who argued that Government was supposed to provide clean water instead of taxing what was on the shelves.
The judge was told neither Parliament nor Treasury were consulted on the EGMS deal.
Mativo agreed with the activist, saying the system was set up using an illegal law, making it equally illegal.
“Tax inherently infringes the right to property, being an expropriation of one’s heard-earned money,” the judge ruled.
“It follows that for a tax to be lawful, the law introducing it must also be lawful but also meet the analysis test of being justifiable and reasonable in an open and democratic society.”