Finance Bill 2025: Goods Shifting from Zero-Rated to Tax-Exempt Status

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  President William Ruto’s cabinet has endorsed the Finance Bill 2025, designed to generate revenue for the fiscal year 2025/26.
  
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  The bill suggested modifications to taxation policies, encompassing an alteration to the Value Added Tax (VAT) Act.
  
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  The amended VAT Act aims to shift certain products, such as raw materials used in pharmaceutical production, from being zero-rated to becoming exempt from taxation.
  
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  Fred Kimotho, who serves as Associate Director at Deloitte Kenya, clarified for .co.ke that being tax-exempt signifies suppliers won’t have the option to reclaim input VAT from the Kenya Revenue Authority (KRA).
  

Nairobi, Kenya

– The Finance Bill 2025 has been released and is awaiting endorsement from the National Assembly.

President William Ruto’s government has endorsed the new revenue-generating measures aimed at financing the fiscal year 2025/26 budget.

The bill suggested modifications to the Value Added Tax (VAT) Act with the aim of amending Section A of the act, as detailed in the first schedule, through the inclusion of additional wording.

These modifications intend to transfer certain items from the zero-rated list to the exempt category.

What does tax-exempt mean?

During an exclusive interview with

.co.ke

Fred Kimotho, who serves as the Associate Director at Deloitte Kenya, clarified that being tax-exempt indicates these goods do not incur any output tax.

Kimotho pointed out that items listed under the tax-exempt category will prevent suppliers from claiming input VAT from the Kenya Revenue Authority (KRA).

“Should the goods be exempt, and the supplier doesn’t levy VAT on their outputs, then they cannot claim input VAT,” explained Kimotho.

As per the Finance Bill 2025, providers of specific products, like raw materials used in pharmaceutical manufacturing, would not be permitted to claim VAT rebates should the legislation pass unchanged.

What items are suggested to be exempt from taxation?

The legislation suggests reclassifying several items currently subject to a 0% VAT rate and shifting them into the tax-exempt category. These include:

• Ingredients or raw materials (whether produced domestically or brought in from abroad) for pharmaceutical companies
• Ingredients or basic components, whether bought domestically or brought in from abroad, used in the production of animal feed.
• Transportation of sugarcane from farms to milling factories
• Supply of locally assembled or manufactured mobile phones
• The supply of motorcycles of tariff heading 8711.60.00.
• The supply of electric bicycles.
• The supply of solar and lithium ion batteries.
• The supply of electric buses of tariff heading 87.02.
• Bioethanol vapour (BEV) stoves classified under HS Code 7321.12.00 (cooking appliances and plate warmers for liquid fuel).
• Materials used for packaging tea and coffee

Why is the government transferring goods to a tax-exempt status?

In the meantime, Treasury Cabinet Secretary (CS) John Mbadi supported the suggestions put forth in the Finance Bill 2025, particularly the proposed changes to the VAT Act.

Mbadi stated that the Bill does not impose any additional taxes or create new ones; instead, it utilizes existing levies to improve revenue collection efficiency.

CS Mbadi, speaking during a town hall meeting in Nairobi on Tuesday, May 6, said the decision to move products from zero-rated to tax-exempt will save money for the exchequer.

He noted that Kenya loses billions of shillings in tax refunds every year due to some fictitious claims.