Duty on industrial inputs a threat

These figures indicate what Kenya could achieve. With the right policy environment to reward investment, boost competitiveness and enable businesses to grow, the sector could contribute even more. Therefore, the question is how Kenya can create the conditions for manufacturing to realise its full potential.

The introduction of excise duty under the Finance Act, 2026 on key industrial inputs including industrial sugar, particleboard and medium-density fibreboard (MDF), raises concerns for the manufacturing sector.

At a time when Kenya should be looking to strengthen the competitiveness and productive capacity of local manufacturers, increasing the cost of essential inputs risks working against that very objective.

Other critical inputs, including printing inks, resins and kraft paper, continue to attract high excise duties despite being essential to industries such as beverages, confectionery, furniture, packaging and printing.

Importantly, all these products are raw materials or intermediate inputs into domestic manufacturing. Imposing heavy taxation at the input stage represents a fundamental distortion of sound fiscal and industrial policy, which should seek to protect and promote local value addition.

While fiscal policy remains an important instrument for revenue generation, additional excise taxes significantly increase production costs which are ultimately passed along the value chain. Because these costs are non-claimable, they place additional pressure on manufacturers, eroding export competitiveness and potentially reversing trade gains by making imported goods more attractive.

Some provisions were not part of the Finance Bill, 2026. Clauses on wood-based panels such as MDF and industrial sugar did not benefit from the same level of stakeholder engagement as the others during the public participation process.

The provision on excise duty on wood-based panels was introduced through a Supplementary Order Paper during the later stages of the Parliamentary process. Industry players along the affected value chain and Kenyans had no opportunity to assess the proposals, quantify their potential impact or provide feedback on measures with significant implications.

The Departmental Committee on Finance and National Planning later recommended a process of local capacity verification, but the period before the Second Reading was short, posing a challenge in conducting a comprehensive assessment.

The increase in excise duty on imported sugar from Sh7.5 to Sh40 per kilogramme, a 433 percent increase, is a significant and disproportionate policy change for local industry.

While the objective of promoting local value addition and supporting domestic sugar production is commendable, this is set to drive up the cost of industrial sugar, a critical input for manufacturers of beverages, confectionery, pharmaceuticals and baked goods.

For manufacturers that rely on industrial sugar, the higher duty is expected to drive up production costs, affecting competitiveness in domestic and export markets where margins range from 3-5 percent. The effects will reverberate across interconnected sectors in packaging and logistics.

Kenya currently has limited capacity to produce industrial-grade sugar at the scale and specifications required by manufacturers and rely on imports.

Unlike household sugar, industrial sugar serves specialised manufacturing needs and does not directly compete with locally produced sugar. A sharp increase in taxation may not immediately encourage import substitution but could instead raise the cost of production for manufacturers.

A more balanced approach would be to support the gradual development of local industrial sugar capacity while ensuring manufacturers retain access to competitively priced inputs during the transition.

The 30 percent excise duty on wood-based panels risks reversing policy measures that previously supported the growth of the furniture industry. In recent years, the government has deliberately created a tax differential between imported finished furniture and raw materials used by local manufacturers.

This approach helped make local production more competitive, encouraged investment in furniture manufacturing, created jobs and supported the expansion of furniture exports into regional markets.

The introduction of additional excise duty on wood-based panels and related inputs could erode these gains and eliminate the competitive advantage that has enabled the sector to grow.

Subsequently, making imported finished furniture comparatively more attractive and potentially discouraging further investment in local manufacturing. Government has, without intending to, protected the foreign manufacturer's cost advantage rather than the Kenyan manufacturer's market.

Modern manufacturing systems globally rely on integrated supply chains that combine locally produced and imported inputs to achieve efficiency, quality and scale. Additional excise duties on key imported industrial inputs could inadvertently weaken the competitiveness of local manufacturers.

The proposal also comes at a time when Kenya is actively promoting industrialization, regional trade integration and export-led growth through various trade frameworks. Manufacturers have made investment decisions based on a policy environment that encourages value addition and regional competitiveness.

Any significant increase in the cost of key production inputs should be carefully assessed to ensure it does not unintentionally undermine these objectives.

While excise duty is intended to be a neutral domestic tax applied regardless of a product’s origin, its practical impact can sometimes differ depending on how it affects production costs within a value chain. Where taxes significantly increase the cost of essential inputs, they inadvertently reduce manufacturers’ ability to compete against finished products entering the country.

A balanced policy approach should support the development of local input industries while preserving the competitiveness of downstream manufacturers. By maintaining a predictable and growth-oriented investment environment, Kenya can continue to strengthen its manufacturing base, expand exports and advance broader industrialization ambitions.

As the country continues to position itself as a regional manufacturing hub, domestic policies need to align with these broader economic objectives.

Excise duty is not a tool of industrial protection. Its increasing application on raw materials and intermediate inputs represents a fundamental misapplication of the tax. We must carefully assess the broader implications of taxation measures on strategic manufacturing inputs.

The writer is the Chief Executive of Kenya Association of Manufacturers and can be reached at [email protected]