National Treasury Cabinet Secretary John Mbadi has defended a contentious proposal in the Finance Bill 2025 to reclassify certain goods and services from zero-rated to VAT-exempt, stating that the move is expected to save the government up to Sh29.5 billion annually.
Addressing the media, Mbadi said the current system of zero-rating key goods like bread and milk has resulted in a heavy fiscal burden due to escalating tax refund obligations to manufacturers.
He argued that the measure, while initially designed to cushion low-income households, has failed to achieve its intended impact.“Zero-rating has led to significant tax refund liabilities which continue to strain public finances,” said Mbadi. “Transitioning some goods to VAT-exempt status is a necessary step towards fiscal sustainability.”
Under the current tax framework, zero-rated goods are not taxed at the point of sale and allow producers to claim VAT refunds on inputs used in production.
In contrast, tax-exempt goods are also not taxed at the point of sale but do not allow for such input refunds. This difference significantly affects the cash flow of manufacturers and the government’s tax refund obligations.
Among the affected items in the proposed reclassification are essential household commodities such as bread and milk—staples in many Kenyan homes.
While the public may not notice an immediate price increase at checkout due to continued tax exemption, manufacturers may face higher production costs as they lose eligibility for input VAT refunds.
Mbadi emphasized that the new approach is part of a broader strategy to streamline the tax system and reallocate resources toward more targeted social protection programmes that directly benefit vulnerable populations.“We must strike a balance between efficient revenue collection and the sustainable delivery of subsidies.
This policy shift will help us do just that,” he said.The proposal is already stirring debate among consumer rights groups and industry stakeholders, many of whom fear the changes could lead to price hikes or disincentivize local production.
However, the Treasury maintains that the long-term fiscal gains and the potential for better-directed welfare support outweigh the short-term disruptions.
The Finance Bill 2025 is currently under public consultation, and Parliament is expected to begin debating it later this month.
