(Bloomberg) -- Kenya’s High Court quashed a tax measure meant to bankroll President William Ruto’s campaign pledge to build affordable housing, saying it was unconstitutional.

A mandatory 1.5% housing levy for employees and matched by employers was declared “discriminatory and unfair” because it only applied to those with formal jobs and not the informal sector, Judge David Majanja said in the capital, Nairobi, on Tuesday. 

The revenue agency can, however, keep collecting the tax pending an appeal to be filed before Jan. 10, according to the three-judge bench.

The doubling of value-added tax on fuel to 16% and a five-percentage point increase in the personal income tax rate for the highest earning individuals were properly enacted, the three-judge bench ruled. Other new revenue-raising measures included higher excise duty on fees charged for money transfer services and a 3% tax on digital assets. 

Nearly a dozen cases, including one by opposition leader Raila Odinga, were filed at the High Court challenging the legality of the taxes, which targeted raising an additional 211 billion shillings ($1.38 billion) in the current fiscal year through June. The housing levy raised 16.24 billion shillings in the four months to October, Housing Principal Secretary Charles Hinga said earlier this month.

Bottom-Up Agenda

The reversal of the housing levy is a setback to the roll-out of Ruto’s so-called Bottom-Up agenda, which aims at generating jobs and firing up the economy. It focuses on boosting agriculture, small businesses and information and communication technology, and providing access to universal health care and affordable homes.

Read more: ‘Paramilitary’ Tax Agents Deployed in Kenya’s Revenue Drive 

The controversial new taxes are a focal point for investors monitoring the nation’s debt burden and the government’s ability to repay $2 billion of Eurobonds that fall due in June. Kenya spends more than half of its tax revenue on servicing debt. 

Yields on the government’s 2024 notes rise 10 basis points to 14.24% by 1:01 p.m. in London. The shilling was marginally weaker, having lost about 20% against the dollar since the start of the year.

Scrapping the levies poses a further risk to Kenya’s budget, with first-quarter tax collection having already fallen 11% below target. 

Revenue Target

The government raised its total revenue target for the year through June 2024 by 39.7 billion shillings to 3.02 trillion shillings due to the new tax measures, “which are expected to boost revenue collection above the historical average growth rate of about 10%,” according to a National Assembly committee report on a supplementary budget passed last week by lawmakers. The report didn’t take the court ruling into account. 

The judgment means the government will have to either curtail expenditure or increase borrowing, according to Churchill Ogutu, an economist at IC Asset Managers. “Unfortunately, none of the two options are silver bullets and the government will find itself between a rock and a hard place,” he said. 

The fiscal deficit is seen ballooning to 5.3% of gross domestic product in the fiscal year through June 2024, compared with the 4.4% originally approved, owing to carryovers and higher debt-service costs, according to the supplementary budget.

The ruling is a “disaster for Treasury,” said Deepak Dave, an analyst at Toronto-based Riverside Advisory.

(Updates with decision to allow levy collection pending appeal in third paragraph)

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