Highlights of the Proposed Tax Changes in the Finance Bill 2025

The Finance Bill 2025, tabled before Kenya’s National Assembly on 30th April 2025, introduces a comprehensive set of amendments to various tax statutes, including the Income Tax Act (ITA), Value Added Tax Act (VAT Act), Tax Procedures Act (TPA), Excise Duty Act (EDA), and Miscellaneous Fees and Levies Act. These changes, largely effective from 1st July 2025, with select provisions deferred to 1st January 2026, aim to broaden the tax base, enhance administrative efficiency, and align with the government’s Medium-Term Revenue Strategy (MTRS) for FY 2024/25 to 2026/27. However, the Bill diverges from some MTRS commitments, notably the anticipated reduction of the corporate tax rate from 30% to 25%. This commentary provides a detailed analysis of the key proposals, their potential impacts on taxpayers and businesses, and the broader economic implications.

A. Proposed Amendments to the Income Tax Act

1. Restriction on Carry-Forward of Tax Losses

Proposal: The Bill limits the carry-forward of tax losses to five years, effective 1st July 2025, replacing the current indefinite carry-forward provision.

Impact and Analysis: This restriction significantly curtails taxpayers’ ability to offset losses against future taxable income, particularly affecting industries with long gestation periods, such as startups, manufacturing, and capital-intensive sectors. Without a grandfathering clause, existing losses older than five years may be written off, increasing tax liabilities and reducing financial flexibility. Historically, Kenya has oscillated on this policy—previously limiting losses to four years (pre-2016), then nine years (2015), before allowing indefinite carry-forward in 2021. This frequent policy shift undermines tax certainty, a critical factor for investor confidence. Businesses may face higher effective tax rates in the short term, potentially discouraging investment in high-risk, high-reward sectors.

2. Introduction of Advance Pricing Agreements (APAs)

Proposal: Effective 1st January 2026, the Bill introduces APAs, allowing taxpayers to agree with the Commissioner on transfer pricing methodologies for related-party transactions, valid for five years unless voided due to misrepresentation.

Impact and Analysis: APAs are a progressive step, aligning Kenya with global standards and East African Community (EAC) peers like Rwanda, Uganda, and Tanzania. They promise greater certainty and reduced disputes in transfer pricing, a contentious area for multinational enterprises. However, the success of APAs hinges on the Kenya Revenue Authority’s (KRA) capacity to implement them effectively. Past regional challenges suggest that clear regulations and adequate resources are essential. If executed well, APAs could enhance Kenya’s attractiveness as a business destination by minimizing tax-related uncertainties.

3. Broadening the Significant Economic Presence Tax (SEPT)

Proposal: Effective 1st July 2025, the Bill expands SEPT to cover all non-residents deriving income from Kenya via the internet, electronic networks, or digital marketplaces, removing the KES 5 million turnover threshold introduced in 2024.

Impact and Analysis: This expansion risks overreach by taxing all non-residents, regardless of economic scale, undermining the principle of targeting “significant” economic presence. In contrast, Nigeria’s SEPT regime applies only to non-residents with annual income exceeding USD 65,000, reflecting a more selective approach. The absence of a turnover threshold may strain KRA’s administrative capacity, as monitoring small-scale digital transactions is resource-intensive. This could deter smaller foreign digital businesses from engaging with Kenya, potentially stifling innovation and cross-border digital trade. Clear regulations are needed to balance revenue goals with administrative feasibility.

4. Preferential Tax Regime for Nairobi International Financial Centre (NIFC)

Proposal: Effective 1st July 2025, the Bill introduces a preferential corporate tax rate of 15% for the first ten years and 20% for the next ten for NIFC-certified entities meeting specific investment and employment criteria. Startups receive 15% for three years and 20% for four years, with withholding tax exemptions on dividends for reinvestments of at least KES 250 million.

Impact and Analysis: These incentives aim to boost NIFC’s appeal, which has lagged behind Special Economic Zones (SEZs) due to stringent requirements. The KES 3 billion investment threshold and local employment mandates may limit uptake, particularly for smaller investors. While the measures signal Kenya’s ambition to become a regional financial hub, their success depends on addressing bureaucratic hurdles and aligning NIFC benefits with SEZ-like flexibility. The dividend exemption is a strong incentive but may primarily benefit larger firms capable of significant reinvestment.

5. Capital Gains Tax (CGT) Exemption for Property Transfers

Proposal: Effective 1st July 2025, the Bill exempts CGT on asset transfers to a company wholly owned by an individual, expanding the current exemption limited to spousal or family-owned companies.

Impact and Analysis: This is a taxpayer-friendly measure, facilitating estate and business planning by allowing individuals to restructure assets without CGT liability. However, the lack of a corresponding stamp duty exemption (1%–4% of property value) reduces the provision’s overall benefit. Taxpayers may still face significant costs, potentially limiting the provision’s uptake. A holistic exemption covering both CGT and stamp duty would enhance its effectiveness.

6. Repeal of Investment Deduction Incentives

Proposal: Effective 1st July 2025, the Bill eliminates the 100% investment deduction for significant capital investments outside Nairobi and Mombasa or within SEZs, reverting to standard allowances (10%–50%).

Impact and Analysis: This repeal is a significant blow to investors, particularly in SEZs and rural areas, where the 100% deduction provided a critical tax shield. The shift to lower standard allowances increases taxable income in early operational years, potentially deterring foreign direct investment. Compared to regional peers offering generous incentives, Kenya risks losing competitiveness. The proposal contradicts the MTRS’s investment promotion goals, necessitating reconsideration to maintain Kenya’s appeal as an investment destination.

7. Clarity on SEZ Property Transfer Exemption

Proposal: Effective 1st July 2025, the Bill clarifies that CGT exemptions apply to property transfers within SEZs by licensed developers, enterprises, or operators.

Impact and Analysis: This amendment resolves longstanding ambiguity, enhancing certainty for SEZ investors. By explicitly limiting the exemption to licensed entities, it ensures targeted application, reducing disputes and encouraging investment in SEZs. The clarity is a positive step, though its impact may be tempered by the simultaneous repeal of investment deductions.

8. Scrapping of Rebates for Housing and Motor Vehicle Sectors

Proposal: Effective 1st July 2025, the Bill eliminates the 15% income tax rebate for developers constructing 100+ residential units annually and the 15% corporate tax rate for local motor vehicle assemblers.

Impact and Analysis: The removal of the housing rebate, introduced in 2017 to support affordable housing, is misaligned with Kenya’s housing deficit (200,000 units annually). With the Affordable Housing Fund unlikely to meet demand, retaining the rebate could incentivize private sector participation. Similarly, scrapping the motor vehicle assembler incentive threatens an nascent industry critical for industrialization. Both proposals align with the MTRS’s phase-out of preferential rates but risk undermining strategic sectors, warranting parliamentary scrutiny.

9. Pension and Gratuity Tax Exemptions

Proposal: Effective 1st July 2025, the Bill exempts all pension withdrawals for members of registered funds with 20+ years of membership and all gratuity payments, aligning with the MTRS’s exempt-exempt-exempt model.

Impact and Analysis: These exemptions enhance retirement income security, supporting the MTRS’s pension tax reform. By removing the KES 300,000 cap on pension exemptions and extending gratuity exemptions beyond public schemes, the Bill benefits retirees. However, the 20-year membership requirement may exclude younger workers, suggesting a need for broader criteria to maximize impact.

10. Expanded Definitions of Royalties and Related Persons

Proposal: Effective 1st July 2025, the Bill broadens the royalty definition to include software distribution payments and expands the “related person” definition to cover third-party relationships and familial ties.

Impact and Analysis: The royalty expansion contradicts OECD guidance and Kenyan jurisprudence, which distinguish software distribution from exploitation. This could increase tax liabilities for software distributors, potentially raising costs for consumers. The broader “related person” definition strengthens transfer pricing oversight but may complicate compliance for businesses with complex ownership structures. Both changes require careful implementation to avoid unintended consequences.

11. Other Income Tax Proposals

• Minimum Top-Up Tax Clarity: Setting the due date as the fourth month after the year of income enhances predictability for this new tax.

• Digital Asset Tax Reduction: Lowering the rate from 3% to 1.5% encourages digital asset market growth, a forward-looking move.

• Employment Tax Reliefs: Mandating employers to apply all reliefs ensures employees maximize benefits, improving compliance.

• Per Diem Threshold Increase: Raising the non-taxable per diem from KES 2,000 to KES 10,000 aligns with inflation, benefiting employees.

• Extended Exemption Certificate Timeline: Extending the Commissioner’s review period to 90 days allows thorough vetting, though it may delay approvals.

B. Amendments to the Tax Procedures Act

1. Agency Notices and Access to Justice

Proposal: Effective 1st July 2025, the Bill allows the Commissioner to issue agency notices despite ongoing appeals, effectively adopting a “pay now, argue later” policy.

Impact and Analysis: This proposal risks violating taxpayers’ constitutional right to justice under Article 48 by demanding immediate payment of disputed taxes. It could strain cash flows, particularly for businesses with legitimate appeals, and delay refunds even if appeals succeed. Extending this power to non-residents aligns with SEPT enforcement but amplifies concerns about fairness. Strong safeguards are needed to prevent abuse and protect taxpayer rights.

2. Data Privacy Concerns

Proposal: Effective 1st July 2025, the Bill removes restrictions on the Commissioner accessing trade secrets or customer data, broadening KRA’s data integration powers.

Impact and Analysis: While enhancing tax transparency, this proposal raises significant privacy and confidentiality concerns. Without robust safeguards, sensitive data could be exposed, risking competitive harm and reputational damage. Kenya’s Data Protection Act requires stringent controls, and KRA must clarify how it will secure data to maintain trust and compliance.

3. Transparency in Amended Assessments

Proposal: Effective 1st July 2025, the Bill mandates the Commissioner to provide reasons for amended assessments.

Impact and Analysis: This codifies existing judicial expectations, enhancing transparency and accountability. Taxpayers can better challenge assessments, reducing disputes and fostering trust in KRA’s processes.

4. Stamp Duty Exemption for Tax Recovery

Proposal: Effective 1st July 2025, property transfers for tax recovery are exempt from stamp duty.

Impact and Analysis: This facilitates faster tax recovery by reducing costs for buyers of distrained properties, improving KRA’s enforcement efficiency. It indirectly benefits taxpayers by streamlining recovery processes.

5. Extended Refund Timelines

Proposal: Effective 1st July 2025, the Bill extends refund/offset processing from 90 to 120 days (180 days if audited).

Impact and Analysis: While accommodating KRA’s workload, this delays cash flow relief for taxpayers, potentially straining businesses. Balancing administrative needs with taxpayer liquidity is critical.

6. Reversal of Appeal Timeline Calculations

Proposal: Effective 1st July 2025, the Bill reverts to requiring filings on the preceding working day if deadlines fall on weekends/holidays.

Impact and Analysis: This shortens effective filing periods, potentially disadvantaging taxpayers. The rapid reversal of a 2024 reform raises concerns about policy stability, undermining tax certainty.

7. Penalty and Interest Waivers

Proposal: Effective 1st January 2026, the Cabinet Secretary can waive penalties/interest due to system errors.

Impact and Analysis: This taxpayer-friendly provision addresses unfair penalties from KRA system failures, enhancing fairness in digital tax administration.

C. Amendments to the Value Added Tax Act

1. VAT Adjustment for Misuse

Proposal: Effective 1st July 2025, taxpayers must account for VAT if exempt/zero-rated goods are used inconsistently with their intended purpose.

Impact and Analysis: This closes loopholes, aligning with global best practices. Clear guidelines are needed to ensure consistent application and prevent disputes.

2. Restrictions on VAT Withholding Credits

Proposal: Effective 1st July 2025, the Bill limits VAT withholding credits to input tax deductions, removing offset/refund options.

Impact and Analysis: This restricts cash flow flexibility, potentially increasing financial strain for businesses reliant on offsets. The change aims to curb revenue leakage but may delay recoveries, necessitating alternative relief mechanisms.

3. Bad Debt VAT Offset

Proposal: Effective 1st July 2025, taxpayers can offset bad debt VAT refunds against other VAT liabilities with Commissioner approval.

Impact and Analysis: This supports cash flow for compliant taxpayers, particularly in sectors with high credit risk. Streamlined approval processes will maximize its benefits.

4. Reduced Refund Claim Timelines

Proposal: Effective 1st July 2025, the Bill shortens general VAT refund claims from 24 to 12 months and bad debt refund waiting periods from 3 to 2 years.

Impact and Analysis: The shorter general refund window pressures taxpayers to reconcile promptly, potentially leading to missed claims. The bad debt reduction is positive, enabling faster recovery, though the 10-year claim deadline provides flexibility.

5. VAT Treatment Changes

Proposal: Effective 1st July 2025, the Bill shifts some zero-rated supplies to exempt status and subjects certain exempt supplies to 16% VAT.

Impact and Analysis: Exempt supplies restrict input VAT claims, increasing costs for suppliers and consumers, particularly in medical, transport, and agricultural sectors. The shift to standard VAT raises consumer prices, potentially affecting affordability. Detailed sector-specific impacts require further stakeholder consultation.

D. Amendments to the Excise Duty Act

1. Tariff Classification Alignment

Proposal: Effective 1st July 2025, goods under the EDA will follow EAC Common External Tariff classifications.

Impact and Analysis: This codifies existing practice, enhancing legal certainty and simplifying compliance for taxpayers and administrators.

2. Expanded Digital Lender Definition

Proposal: Effective 1st July 2025, the Bill redefines “digital lender” to include unregulated entities providing credit electronically, excluding banks, Saccos, and microfinance institutions.

Impact and Analysis: This broadens the excise duty net, targeting unregulated digital lenders. However, drafting errors (e.g., referencing the Cooperative Societies Act instead of the Sacco Societies Act) require correction. Clarity on cooperative societies’ exclusion is also needed to prevent misapplication.

3. Expanded Digital Services Scope

Proposal: Effective 1st July 2025, the Bill extends excise duty to non-resident digital services over the internet, electronic networks, or digital marketplaces.

Impact and Analysis: This aligns with SEPT’s expansion, capturing a wider range of digital transactions. It strengthens revenue collection but risks administrative complexity without robust enforcement mechanisms.

4. Excise Duty Licence Timelines

Proposal: Effective 1st July 2025, the Commissioner must decide on excise duty licence applications within 14 days.

Impact and Analysis: This enhances administrative efficiency, providing businesses with faster certainty and supporting operational planning.

5. Excise Duty Changes

Proposal: Effective 1st July 2025, the Bill removes excise duty on imported eggs, onions, potatoes, and certain paper products, increases duty on imported plastics, and introduces duty on specific imported products and high-strength alcohol.

Impact and Analysis: Excluding certain goods reduces consumer costs, supporting affordability. Higher plastic duties raise import costs, likely passed to consumers, while new duties on alcohol target specific industries. These changes require careful monitoring to balance revenue and market impacts.

E. Amendments to the Miscellaneous Fees and Levies Act

1. Narrowed Aircraft Exemptions

Proposal: Effective 1st July 2025, the Bill limits exemptions from Import Declaration Fee and Railway Development Levy to specific aircraft and parts.

Impact and Analysis: This increases costs for broader aviation goods, potentially affecting airlines and related industries. The aviation sector’s growth may be constrained, requiring targeted relief to maintain competitiveness.

2. Reduced Export Promotion Levy

Proposal: Effective 1st July 2025, the Bill lowers the Investment Promotion Levy on certain steel products from 17.5% to 5%.

Impact and Analysis: This supports export competitiveness, particularly in manufacturing, aligning with investment promotion goals. It may stimulate industrial growth but requires monitoring to ensure revenue impacts are manageable.

Conclusion

The Finance Bill 2025 introduces significant tax reforms with mixed implications. While measures like APAs, NIFC incentives, and pension exemptions are progressive, the repeal of key incentives and expanded tax scopes risk increasing burdens on taxpayers and deterring investment. Balancing revenue needs with economic growth requires careful calibration, robust administrative support, and meaningful stakeholder engagement to ensure the Bill supports Kenya’s long-term fiscal and developmental goals.