What’s on the Table?

The core of the proposed changes lies in the removal of several items from the zero-rated VAT schedule. This means these items, currently taxed at 0%, would now be subject to the standard 16% VAT. Key areas affected include:

• Pharmaceuticals and Animal Feed: Inputs and raw materials used in the manufacture of drugs and animal feed are slated to lose their zero-rated status. This could lead to higher costs for both healthcare providers and farmers, ultimately impacting consumers.
• Sugarcane Transportation: The cost of transporting sugarcane, a crucial component of the sugar industry, is also targeted for the 16% VAT.
• E-Mobility and Green Energy: The government’s commitment to green initiatives appears to be wavering. The Bill proposes a 16% VAT on electric buses, solar batteries, lithium batteries, and electric bicycles. This could significantly hinder the adoption of these environmentally friendly alternatives.
• Mobile Phone Manufacturing: The manufacture and assembly of mobile phones are also being removed from the zero-rating schedule.
• Mobile Phone Manufacturing: The supply of locally assembled and manufactured mobile phones are also being removed from the zero-rating schedule.
• Bioethanol Vapor Stoves: The supply of bioethanol vapor stoves classified under HS Code 7321.12.00 (cooking appliances and plate warmers for liquid fuel) will also be subject to VAT.
• Motorcycles: The supply of motorcycles of tariff heading 8711.60.00 will also be subject to VAT.
• Packaging Materials: Packaging materials for tea and coffee upon recommendation by the Cabinet Secretary for matters relating to agriculture will also be subject to VAT.

Other Notable Changes:

Beyond the VAT changes, the Finance Bill proposes several other significant amendments to various tax laws:

• Income Tax Act Amendments: The bill proposes several amendments to the Income Tax Act, including changes to the definition of “related person,” increases to the minimum amount for certain tax deductions, and modifications to the treatment of fringe benefits (See sections 2, 3, 5, 9, 29 of the Bill).
• Excise Duty Act Amendments: The bill proposes changes to the Excise Duty Act, including a new definition of “digital marketplace” and changes to the excise duty rates on certain imported goods (See sections 38, 42 of the Bill).
• Tax Procedures Act Amendments: The bill proposes changes to the Tax Procedures Act, including changes to the process for amending assessments and for settling tax liabilities (See sections 44, 46 of the Bill).

Why the Change?

The government argues that these changes are necessary to streamline tax administration, reduce tax refunds, and seal loopholes that delay revenue collection. The Cabinet claims the Bill aims to enhance tax efficiency rather than solely focusing on raising taxes.

The Potential Impact:

While the government emphasizes efficiency, critics fear the proposed changes will disproportionately impact ordinary Kenyans.

• Increased Cost of Living: Essential items like food and healthcare could become more expensive, exacerbating the already challenging cost of living crisis.
• Strain on Farmers: The agricultural sector, already grappling with rising input costs due to previous VAT introductions on pesticides and fertilizers, will face further pressure. This could impact food production and affordability.
• Setback for Green Initiatives: The VAT on electric vehicles and renewable energy components could stifle the growth of the green economy and hinder efforts to combat climate change.

The Bottom Line:

The Finance Bill 2025 presents a complex trade-off between revenue generation and the potential impact on key sectors and the cost of living. Businesses and consumers alike need to understand the proposed changes and their potential consequences. It’s crucial for stakeholders to engage in informed discussions and advocate for policies that promote both economic growth and the well-being of all Kenyans.

What are your thoughts on the proposed changes? Share your comments below.

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