The National Assembly’s Finance and Planning Committee has rejected a proposal by the National Treasury to raise additional revenue through the erasure of tax benefits extended to businesses, dealing a blow to the government’s larger scheme to raise Sh30 billion via the Finance Bill 2025.
Treasury was banking on shifting the taxation regime of seven products from zero-rated status to exempt as part of efforts to enhance collections in a bill that avoided tax-raising measures.
The products that had been earmarked for the shift in the Treasury proposal included locally assembled and manufactured mobile phones, electric bicycles, solar and lithium-ion batteries as well as electric buses under tariff heading 87.02.
Others were inputs or raw materials for the manufacture of animal feeds, bioethanol vapor stoves classified under HS Code 12.00, and motorcycles under tariff heading 8711.60.00.
Exempt supplies are not subject to Value-Added Tax (VAT) and do not allow recovery on related costs, while zero-rated supplies are taxed at zero percent but still permit reclaims on inputs.
This means that businesses supplying zero-rated goods can reclaim input VAT, potentially lowering costs, whereas those offering exempt goods cannot, which often leads to higher operating expenses that are passed on to consumers.
In its recommendation, the Parliamentary Committee noted that the identified supplies were only moved to zero-rated status recently under the Finance Act, 2023, arguing that reverting them to exempt status would defeat the intention to lower consumer costs of the essential goods.
“The committee noted that these supplies were only recently moved to zero-rated status under the Finance Act, 2023, as part of efforts to support local industries and reduce the cost of essential goods,” reads the report.
“Therefore, reverting them to exempt status would undermine the objectives of that reform and introduce uncertainty into the tax framework. Such a change could increase production costs, costs likely to be passed on to consumers, ultimately discouraging investment and hindering economic growth.”
If adopted, the recommendation will see revenue targets fall further as the State seeks to pacify the masses and avert a stand-off similar to what was witnessed last year.
The government had, at the time, set out on an ambitious mission to raise Sh314 billion via the tax bill through higher and painful tariffs that would have seen tax hikes worth Sh346 billion.
President William Ruto would later be forced to drop the bill as public pressure mounted, in a botched legislative process that left over 50 people killed.
Treasury Cabinet Secretary John Mbadi told the Business Daily in a recent interview that fear of fresh protests has forced the abandonment of aggressive tax hikes in this year’s Finance Bill.
