Finance Bill 2025

Julians Amboko

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June 2025

CONTEXTUAL ANALYSIS

What are we looking to finance in 2025/26?

How does the Revenue mix look like?

How does the Deficit & Borrowing mix look like?

Kenya has a tax expenditure problem

PROPOSED VALUE ADDED TAX ACT AMENDMENTS

Snapshot of what switching from Zero Rated to Exemption looks like

Snapshot of what switching from Zero Rated to Exemption looks like

• Removal of offset option for withheld VAT
• Finance Bill proposes deleting section 17(5)(c) of the VAT Act, which allows taxpayers to offset any excess input VAT resulting from tax withheld by appointed VAT withholding agents
• The proposed deletion effectively removes the option for taxpayers to apply excess input VAT against other tax liabilities, with the available recourse now being a refund under section 17(5)(b)
• This move narrows the relief options for excess input VAT arising from withholding, making the system less flexible for businesses and increasing reliance on a refund process that is already under strain

• Reduction of the time frame for classifying supply as bad debt
• The Bill proposes reducing the waiting period from the current 3 years to 2 years. Taxpayers will apply for a VAT refund on a bad debt after two years from the date of supply
• This provides for earlier access to refunds, which may improve cash flow for businesses that suffer bad debts.

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• Liability to pay VAT on abuse of exempt and zero-rates supplies/VAT claw back 
• The Bill proposes a provision to impose VAT where goods or services initially acquired as exempt or zero rated are later used or disposed of inconsistently with their intended purpose.
• The measure is aimed at curbing misuse of exemptions and zero rating, particularly in sectors such as education and healthcare, and donor-funded projects, where VAT relief is often granted conditionally. It emphasises that VAT exemptions are not absolute but depend on continued compliance with the intended purpose.

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PROPOSED TAX PROCEDURES ACT AMENDMENTS

• Premature enforcement through agency notices despite pending appeal
• The Bill proposes granting the Commissioner powers to issue agency notices even when the taxpayer has appealed against an assessment specified in a decision of the Tax Appeals Tribunal (TAT) or the higher courts
• This removal effectively grants the Commissioner unrestricted discretion to enforce collection through agency notices at any stage, including when a taxpayer has lodged a valid appeal
• The complete removal of the restriction exposes taxpayers to the risk of aggressive or premature enforcement actions even as the taxpayer proceeds to appeal an assessment.

• Tax refund/offset processing timelines extension
• The Bill proposes extending the period within which the Commissioner must determine an application for offset or refund of overpaid tax from 90 days to 120 days
• By increasing this period, the amendment grants the Commissioner more time to assess applications, which may ease administrative burdens but could also delay resolution for taxpayers

• Refund audits timelines extension
• In cases where a tax refund application is subjected to an audit, the Bill proposes extending the timeline for determining the application from 120 days to 180 days
• While this proposal favours administrative efficiency for the Kenya Revenue Authority, it will result in slower turnaround times and increased uncertainty for taxpayers seeking timely refunds or offsets.

• Removal of restriction on data sharing relating to trade secrets and customer information
• The Bill proposes removing the current limitation on the Commissioner from requiring a person to integrate or share data relating to trade secrets and private or personal data held on behalf of customers or collected in the course of business. This limitation had been introduced earlier by the Tax Procedures (Amendment) Act, 2024.

PROPOSED INCOME TAX ACT AMENDMENTS

• Increase in tax free limit of per diem allowance

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• The Bill proposes amending Sec5 of the Income Tax Act by increasing the deductible per diem for employees in the private sector from Kes 2,000 to Kes 10,000/day
• Implication: This is designed to harmonise what is at play in the private sector with what’s at play in the public sector & provide a boost for employees’ disposable income

• Removal of 100.0% investment allowance

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• The Bill proposes removing the tax incentive that provided for 100.0% investment deductions on hotel buildings, manufacturing sites & equipment for companies that:

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1. Invested >Kes 250.0 million in a year, outside Nairobi or Mombasa counties
2. Made cumulative investments of at >Kes 1 billion in the preceding three years; or
3. Invested in SEZs.

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• Implication:

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1. The effect of this proposal is that capital allowances on capital expenditure for hotel buildings, manufacturing buildings, and machinery used in manufacturing will be claimed at 50% in the first year of use, with the remaining balance claimed in equal annual instalments of 25%
2. While it will likely boost short-term revenue, it may dampen long-term investment in underserved regions and SEZs unless alternative support mechanisms are introduced

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• Reduction in the rate of Digital Asset Tax
• The Bill proposes reducing the tax rate for digital asset tax from 3.0% to 1.5% of the transfer or exchange value of the digital asset.
• Implication:
• It is a welcome breather for the many Kenyans who engage in transactions related to digital assets, especially given how fast growing this segment of the economy is
• The government seems to have prioritized compliance over revenues

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• Removal of preferential rate for construction of up to 400 residential units
• The Income Tax Act currently provides a reduced corporate tax rate of 15.0% for a company that constructs at least 400 residential units annually, subject to approval by the Cabinet Secretary responsible for housing
• Finance Bill 2025 proposes scrapping the 15.0% preferential rate for such companies. The preferential tax treatment was meant to encourage large-scale investment in residential housing, particularly the Government’s affordable housing agenda, and this move could undermine it.

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• Removal of preferential rate for local motor vehicle assemblers
• The Income Tax Act currently provides a reduced corporate income tax rate of 15.0% for companies engaged in the local assembling of motor vehicles, applicable for the first five years from the commencement of operations & which can be extended for another five years
• The removal of this incentive could discourage investment in Kenya’s automotive assembly industry, which has been a focus area for manufacturing sector growth and local job creation.

• Interest on loan used for home construction allowable deduction
• The Bill proposes an amendment to Sec15 to include interest of up to Kes 360,000 being allowed if the taxpayer borrows money from prescribed financial institutions to construct a residential house
• Currently, the ITA only provides the same benefit for loans used for the purchasing or improvement of residential houses occupied by the taxpayer during the year of income
• The amendment seeks to promote home ownership by allowing interest deductions on loans used to construct residential houses

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• Employee reliefs and deductions
• The Bill seeks to introduce the provision that “an employer shall, before computing the tax deductible under subsection (1), grant an employee all applicable deductions, reliefs and exemptions provided under this Act.”
• The idea here is to boost employees’ take home pay
• This view has, however, been challenged by both ICPAK & CDH who argue that the net effect could actually leave the employee more disadvantaged

• Re-introduction of the limit of carrying forward of tax losses
• The Bill amends section 15(3)(b) that allows taxpayers to carry forward their tax losses by restricting the carrying forward of tax losses to 5 years. The Income Tax Act currently allows tax losses to be carried forward indefinitely
• The move may reduce taxpayers’ ability to fully utilise losses from prior periods, especially in capital intensive industries where recovery spans longer periods

Q&A