Cost of medicine, sugar, milk to go up in new Finance Bill

President William Ruto's administration has presented a draft Finance Bill, 2025, which walks a tightrope between offering tax relief to ordinary Kenyans while simultaneously introducing measures likely to increase costs for critical sectors.

The proposed law focuses largely on efficient tax administration rather than introducing new taxes to fund the budget for the financial year starting July 1.

The move is widely seen as the state’s initiative to curb public opposition to its revenue-raising measures, akin to the Finance Bill, 2024, which was rejected in its entirety following bloody protests that claimed lives of tens of people and destroyed property.

The Bill appears to spare the general population from direct tax hikes, but higher prices loom in changes to VAT classifications for essential goods and services, a move that experts warn will see manufacturers pass the cost to consumers, pushing up the overall cost of living.

Treasury wants MPs to reclassify crucial products from VAT zero-rated to VAT-exempt status.

On the surface, both zero-rated and exempt goods reach consumers without VAT charges, but the difference is in how businesses handle input taxes along the production chain.

When products are zero-rated, manufacturers claim refunds for VAT paid on their raw materials, effectively reducing their production costs.

The shift to exempt status means businesses can no longer recover these input taxes and eventually pass the additional costs to consumers through higher prices.

Among the affected items are pharmaceutical manufacturing inputs, sugarcane transportation, locally manufactured mobile phones, electric bicycles, solar and lithium-ion batteries, and animal feed ingredients.

This is likely to see the cost of common commodities such as sugar, milk, medicine, mobile phones, electric bicycles, solar equipment, and lithium batteries go up as manufacturers pass the bill to consumers. 

Ruto has decried the rampant abuse of VAT refunds in the recent past.

Last November, he disclosed that Kenya spends Sh400 billion annually on tax refunds and called for stricter anti-evasion measures.

The President gave a colourful analogy about bakeries employing more accountants than bakers.

While leading Labour Day celebrations yesterday, the President said the Finance Bill is aimed at ensuring efficiency, sealing loopholes, while ensuring there are no new taxes.

“Its provisions are designed to offer targeted relief to both businesses and workers and support the spirit of enterprise and productivity,” Ruto said.

The President has been keen on fixing the tax refunds menace, citing cases of a handful of companies claiming billions.

The Bill, therefore, introduces a new provision that attempts to prevent misuse of tax exemptions.

Taxpayers would, for instance, be required to pay back taxes if they use exempt or zero-rated goods inconsistently with their designated purpose.

There are several other provisions that, if enacted, would offer meaningful relief to specific groups.

Among them is the dramatic increase in tax-free per diem allowances for private sector employees from Sh2,000 to Sh10,000.

This is expected to benefit travellers on official assignments or business and in the long run, stimulate the hospitality industry.

Local farmers could also benefit from the proposed excise duty on imported agricultural products.

The Bill seeks to impose a duty on imported eggs, imported onions, imported potatoes and crisps.

Exporters, particularly in the construction materials sector, also stand to gain from reduced levies on steel products.

The Finance Bill further introduces an exemption of pension and gratuity payments from income tax, thereby providing additional relief to employees.

Persons in senior positions who typically receive larger severance packages are likely to be the bigger beneficiaries.

Also to be exempt from income tax provisions are earnings from timber sales, SHIF contributions and securities traded in Capital Markets Authority-licensed exchanges.

Dividends paid by companies certified by the Nairobi International Financial Centre – that is, if the companies reinvest Sh250 million of the earnings, are also exempt from income tax.

In what could raise significant concerns about privacy rights, the government seeks to remove legal barriers preventing KRA from demanding direct access to business systems.

This provision, which mirrors a controversial attempt in the Finance Bill, 2024, would grant KRA unprecedented access to sensitive commercial data.

Personal customer information is protected under data privacy laws, including M-Pesa transactions and risks of being leaked.

Another potentially burdensome measure is the introduction of withholding tax on goods supplied to public entities and scrap metal sales.

The suppliers and dealers of the said products often operate on thin margins when dealing with government contracts, adding to the woes of pending bills.

The Bill further imposes excise duty on products used as inputs in manufacturing, as well as spirits of above 90 per cent per volume, setting the stage for an increase in prices of alcoholic spirits.