The National Treasury is projecting annual savings of up to Sh29.5 billion through proposed changes to Kenya’s Value Added Tax (VAT) system, as outlined in the Finance Bill 2025. Treasury Cabinet Secretary John Mbadi on Tuesday defended the move to reclassify certain basic goods, including bread and milk, from zero-rated to VAT-exempt status.
Speaking during a media briefing, CS Mbadi said the reclassification aims to curb rising tax refund obligations, which have become a significant drain on public finances under the current zero-rating framework.
“Zero-rating has led to significant tax refund liabilities which continue to strain public resources,” Mbadi noted. “Transitioning some goods to VAT-exempt status is a necessary step towards fiscal sustainability.”
Under the current regime, zero-rated goods are exempt from VAT at the point of sale and allow manufacturers to claim refunds on input VAT paid during production. VAT-exempt goods, however, are not taxed at the point of sale but also do not entitle producers to input tax refunds—effectively raising the cost of production for suppliers.
The proposal, if passed, would affect a range of essential commodities, notably bread and milk, which are consumed widely across low- and middle-income households. While consumers may not face immediate price increases due to the continued exemption at the point of sale, manufacturers are expected to absorb additional production costs, raising fears of indirect price adjustments.
Industry players and consumer advocacy groups have voiced concerns that the reclassification could undermine affordability and threaten the viability of local manufacturers. However, Mbadi insisted the long-term benefits—particularly in redirecting funds toward targeted social protection programmes—justify the policy shift.
“We must strike a balance between efficient revenue collection and sustainable delivery of subsidies. This policy shift will help us achieve both,” he said.
The Finance Bill 2025 is currently under public scrutiny, with stakeholder consultations ongoing. Parliament is expected to begin formal deliberations later this month, as debate intensifies over the broader implications of the proposed tax measures on Kenya’s economy, household spending, and industrial productivity.
If approved, the changes would mark a significant shift in Kenya’s tax policy, aligning it more closely with fiscal consolidation efforts while raising questions about its socio-economic impact.