How tax flip-flops hurt industrialisation dream

In defending the proposed 25 percent excise tax on mobile devices, the National Treasury argues it is simply simplifying the code — collapsing a 55 percent cumulative stack of import fees, levies, and VAT into a single, clean tariff triggered at device activation. On paper, it sounds elegant. In practice, it operates as an asymmetric shock to the very domestic industries the state spent the last three years trying to build.

When local assembly plants such as M-KOPA and East Africa Device Assembly Kenya (EADAK) were established under the Finance Act 2022, they were granted zero-rated VAT status. That policy signal was an invitation: invest millions in capital, hire thousands of Kenyan youth, build local supply chains, and the state will allow you to reclaim input costs to keep smartphones affordable for the low-income consumer.

Finance Bill 2026 effectively tears up that contract. There is no difference between a tax-evading citizen and a promise-evading government.

By shifting locally assembled phones to “VAT-exempt,” assemblers can no longer reclaim those input costs.

Instead of a tax break, local factories must absorb embedded costs on electricity, components, and assembly, while simultaneously facing a significant liquidity drain through the mandatory reversal of previously claimed VAT on existing inventory.

The damage runs deeper than broken promises. The Bill introduces a structural imbalance that defies the logic of industrialisation: imported finished smartphones are granted exemptions from the Import Declaration Fee and the Railway Development Levy, while the raw components imported by local factories to assemble those same phones are not.

When the law treats a fully built import more favourably than a raw component destined for domestic manufacturing, something has gone fundamentally wrong. It creates an environment where formal, compliant sector players are penalised for their visibility, while the informal grey market and smuggled devices thrive in the shadows.

For a consumer purchasing an entry-level smartphone on a financing model, an unannounced 25 percent excise duty combined with trapped VAT is not a minor policy adjustment. It is the difference between accessing mobile banking and being locked entirely out of the formal economy.

There is an old adage in economics: the best tax is an old tax. It is not a defence of outdated systems, but a recognition of a psychological truth — businesses can adapt to almost any rate, provided that rate holds still long enough to build a factory around.

When policy becomes a moving target, businesses stop investing in long-term infrastructure, hiring permanent staff, or funding local research and development. Instead, they price a “policy risk premium” into everything they do — or worse, they relocate to jurisdictions where a promise made in 2023 still holds weight in 2026.

A predictable tax environment is not merely good economics; it is a cornerstone of fairness. When rules change annually, the state signals to investors — domestic and foreign alike — that their capital is hostage to the shifting pressures of the exchequer’s cash flow.

If Parliament wishes to protect the long-term health of the economy, it must anchor tax policy in stability, not seasonal experimentation. Wielding the tax code like a thermostat — cranking it up and down to meet immediate revenue targets — ultimately breaks the dial.

We cannot tax our way into a digital economy if we keep changing the rules of the road every four or five years. The proposed changes targeting the local mobile phone assembly industry are a textbook example of how policy unpredictability destroys economic gains faster than any market downturn.

A stable, predictable tax code that holds constant for a decade will always generate more revenue and more progress than a higher, volatile rate that collapses the very industry it seeks to tax. Fairness is not just about what the State collects. It is about giving those who invest the courtesy of a stable horizon

The writer is a former managing editor of The EastAfrican.