Finance Bill 2025: Government retreats on new taxes, but questions linger over policy commitment

By Fredrick Kimotho

In April 2023, Kenya took a decisive step towards streamlining its tax system through the tabling of the National Tax Policy, Sessional Paper No. 2 of 2023, in Parliament. This policy was aimed at creating a coherent, transparent, and predictable tax regime.

Shortly thereafter, the government followed up with the Medium-Term Revenue Strategy (MTRS), which outlined specific tax measures and timelines for implementation, covering the financial years 2024/25 to 2026/27. Together, these documents were meant to act as the blueprint for rationalising tax policy and administration over the medium term.

Through the Finance Bill 2024, the Government sought to raise Ksh345 billion by way of new taxes and other taxation measures. This was confronted with a strong public backlash.

Protests broke out across the country as citizens voiced frustration with what they viewed as relentless and tone-deaf tax increases. The protests reflected deep-seated public resentment toward a taxation model perceived to be punitive and detached from the realities faced by ordinary Kenyans.

Tactical retreat from tax hikes

In what appears to be a direct response to this public outcry, the Finance Bill 2025 (“the Bill”) has taken a markedly different tone. It avoids introducing new taxes and instead focuses on what has been termed as “clean-ups”. These include technical corrections, enforcement measures, and administrative adjustments meant to improve tax compliance and efficiency.

While this shift is welcome, especially from a public trust perspective, some of the proposals raise important questions about the Government’s fidelity to its own long-term policy frameworks.

Inconsistencies in policy commitments

Indeed, upon closer inspection, several inconsistencies emerge between the Bill, the MTRS, and the National Tax Policy. For instance, amendments proposed in December 2024, such as the exclusion of weekends and public holidays in calculating timelines for objections and appeals, are now being reversed.

There is no shortage of examples of recent amendments being reversed under the Bill. This directly contradicts the National Tax Policy’s stipulation that tax laws should remain stable for at least five years to foster predictability.

Additionally, the Bill proposes reclassifying certain goods and services from zero-rated to exempt and from exempt to taxable. A good example is the proposal to impose VAT on specialised equipment for development and generation of solar and wind energy.

These shifts could have unintended consequences on key sectors, including health, education, and climate initiatives, and may erode the government’s policy commitments in those areas.

Furthermore, although the MTRS advocates for the gradual phasing out of preferential tax rates, the Finance Bill curiously reintroduces several such incentives, creating a patchwork that could confuse investors and weaken the policy’s credibility.

Soon, we may find ourselves in a scenario where these preferential rates are being repealed as has been the case with the frequent reclassification of the VAT status of many goods and services because past classifications may not have been informed by a coherent policy framework.

Missed opportunities

The Bill also seems to miss some critical opportunities outlined in the MTRS implementation matrix. Among them is the reduction of the VAT rate by one percent, which was scheduled to alleviate consumer pressure while improving compliance.

Similarly, the corporate income tax (CIT) rate was expected to be reduced to 28 percent, a move that could enhance Kenya’s competitiveness within the region.

Moreover, the long-overdue review of PAYE bands, which are widely seen as non-progressive and burdensome to especially low and middle-income earners, seems to have been conveniently missed out.

Predictable and investor-friendly fiscal environment

In conclusion, while the Finance Bill 2025 offers some relief by avoiding new taxes, it raises valid concerns about the government’s commitment to its stated policy direction.

The mixed signals not only undermine the credibility of key tax reform instruments like the MTRS and National Tax Policy, but also cast doubt on Kenya’s readiness to offer a predictable and investor-friendly fiscal environment.

For tax reform to be truly effective, alignment between policy intent and legislative action is not optional. It is imperative. We trust that the public participation window which has been afforded to Kenyans by the National Assembly will remedy some of the evident inconsistencies, and that going forward, there will be greater stability of tax policy to enhance investor confidence.

________________

Fredrick Kimotho is an Associate Director with Deloitte East Africa. The views presented are his own and not necessarily those of Deloitte. He can be reached at [email protected].