The Finance Bill, 2025, has sparked widespread interest among citizens, and one area drawing scrutiny is the proposed reclassification of several goods and services from VAT zero-rated to tax-exempt status. While these two categories may seem similar on the surface, both relieve the consumer from paying VAT, the underlying mechanics and impact on businesses are fundamentally different. Zero-rated goods are taxed at a rate of 0%, meaning suppliers do not charge VAT to customers but can still claim input VAT on the materials used in producing these goods. This system keeps the supply chain cost-efficient, encourages local production, and supports affordability. In contrast, exempt goods are not subject to VAT either; however, suppliers cannot claim back input VAT. This makes the supply chain more expensive, as manufacturers and service providers bear the full burden of VAT on inputs without reimbursement, often resulting in higher consumer prices or reduced profit margins.

The Finance Bill now proposes to delete a range of previously zero-rated items and classify them as exempt. These include the transportation of sugarcane from farms to milling factories, the supply of locally assembled and manufactured mobile phones, motorcycles, electric bicycles, solar and lithium-ion batteries, electric buses, bioethanol vapour (BEV) stoves, and packaging materials for tea and coffee. While this change may appear technical, its implications are broad and deep. By shifting these items to exempt status, the government effectively removes the ability of businesses to claim input VAT, thereby increasing the cost of manufacturing or supplying these products. This could raise end-user prices and hinder progress in sectors that the government itself has championed, such as clean energy, local manufacturing, and green mobility.

For example, electric buses and solar batteries are vital to Kenya’s climate goals. Reclassifying them as exempt undermines efforts to make clean technology accessible and affordable. Similarly, removing zero-rating on locally assembled mobile phones may lead to higher prices, hurting both consumers and the “Buy Kenya, Build Kenya” agenda. The shift also raises concerns for agriculture, as the transportation of sugarcane and packaging materials for tea and coffee now incurs additional hidden costs, which is ironic for a country striving to boost value addition in agribusiness. These changes signal a tightening fiscal stance by the Treasury, possibly in an effort to broaden the tax base or manage VAT refunds. Still, they risk disincentivising sectors crucial to economic growth, job creation, and sustainability.

As public discourse around the Finance Bill, 2025, gains momentum, stakeholders need to engage constructively. The reclassification may seem like a technical adjustment, but its impact could be deeply felt across households and industries alike.