Sparking industrial growth in Finance Bill 2026

One of the most persistent obstacles facing manufacturers is the backlog of value-added tax (VAT) refunds. As at February 2026, businesses were owed at least Sh35 billion, straining cash flows and stifling expansion.

Addressing this challenge calls for the amendment of relevant laws to allow the Kenya Revenue Authority (KRA) to retain a designated portion of VAT collections for refund payments.

Equally important is adherence to fundamental VAT principles which require that inputs and corresponding finished goods are VAT-exempt or zero-rated. For products subject to VAT, input VAT incurred can be recovered through input tax, lessening the tax burden.

In addition, the government should prioritise the settlement of the existing refund backlog through a dedicated budgetary allocation and increase monthly refund disbursements to at least Sh. 5 billion.

The proposal to re-classify several goods and production inputs from zero-rated to VAT-exempt poses significant challenges to manufacturers. Manufacturers cannot recover the VAT they pay on raw materials, packaging, transport and other production costs when a product is VAT exempt. This proposal will increase production costs, thereby making locally manufactured goods more expensive.

Where products attract the standard 16 percent VAT, manufacturers can claim back the VAT paid during production.

The proposed removal of zero-rating on pharmaceutical inputs would increase production costs for local manufacturers as it makes input VAT irrecoverable. The result is more expensive medicine and reduced competitiveness, in a sector that is quite critical for national health security.

Kenya has positioned herself as a regional leader in electric mobility, with manufacturers investing heavily in local assembly plants and battery infrastructure. Shifting these products from zero-rated to VAT exempt status would increase taxes on local assemblers while imported fully built units gain a pricing advantage.

The continued expansion of excise duty to additional products presents another challenge for Kenyan manufacturers. Excise duty is increasingly being extended to production inputs and everyday manufactured goods.

The proposal to impose excise duty on locally produced plastic articles, gummed paper, printed self-adhesive paper, and sugar confectionery places an additional burden on industries already grappling with high operating costs.

In addition, the imposition of excise duty on selected produce originating from the East African Community (EAC) such as kraft paper, articles of plastics, printing ink, imported float glass among others, undermines regional trade integration and the principles of the EAC Common Market.

Such measures increase the cost of sourcing raw materials and finished goods from EAC Partner States, create uncertainty for manufacturers relying on regional supply chains for inputs, and may expose Kenyan industries to retaliatory trade measures within the region.

The unpredictability of Kenya’s tax policy environment is one of the biggest impediments to manufacturing sector growth. Constant changes undermine strategic planning, complicate pricing decisions, and weaken investor confidence in Kenya’s business environment.

Taxation on coal demonstrates the impact of policy inconsistency on manufacturers. Within a span of three years, government has introduced, repealed and now seeks to reintroduce excise duty on coal.

The Tax Laws (Amendment) Act, 2024 imposed a 2.5 percent excise duty on coal, which was subsequently scrapped under the Finance Act, 2025. The Finance Bill, 2026 now proposes its re-introduction at an even higher rate of 5 percent. Coal is a critical industrial fuel used by Kenya’s cement, steel, and ceramic industries.

Despite having deposits, the country does not actively mine coal largely due to restrictive environmental rules, forcing manufacturers to rely on imports.

The Finance Bill, 2026 further proposes to extend the excise framework to kraft paper originating from East African Community countries, tightening the pressure on an already strained supply chain.

For Kenya to become a competitive manufacturing and export hub, policy must be designed to be an enabler of growth rather than a barrier to production. Tax policy should strike a balance between short-term revenue collection and long-term economic growth.

The paper and packaging sector also demonstrates how cumulative taxation can shape an entire industry.

The tax burden on kraft paper has risen from below 50percent to about 111percent, made up of multiple layers including 55percent excise duty, 10percent Export and Investment Promotion Levy, 25percent import duty, 16percent VAT, 2.5percent Import Declaration Fee, and a 2percent Railway Development Levy.

Local capacity utilization has dropped, falling to about 33percent for bags and balers and 55 percent for corrugated cartons, while imports of finished packaging materials have surged to 2,442 tonnes and 9,402 tonnes respectively.

Three paper converting plants have closed, resulting in job losses. The impact on export competitiveness has been equally severe. A 17 percent increase in the cost of a flower box alone translates directly into a higher export price for Kenyan flowers, placing exporters at a disadvantage against lower-cost competitors such as Columbia and Ethiopia.

Tobias Alando is the Chief Executive Officer of Kenya Association of Manufacturers (KAM).