Background
The Finance Act 2025 recently signed into law on 26th June 2025 has introduced the following notable changes.
The Value Added Tax Act
The proposed amendments to the Value Added Tax Act include:
1. The period for obtaining Value Added Tax refunds on bad debt is reduced from 3 years to 2 years.
Previously, where a party declares and pays VAT for a product that they are yet to receive payment for, and the customer subsequently defaults on payment, the party had up to 3 years from the date of declaration/payment of the taxes to seek the refund. Under the new regime, the window has been reduced to 2 years. increase of the threshold required for mandatory VAT registration from Kshs 5 Million to Kshs 8 Million.
2. Zero rated goods are now subject to VAT.
Previously, all zero rated goods were exempt from VAT without exception. The new regime has introduced the requirement that all zero rated goods must be deployed for the purposes for which they were indicatively stated. Should they be used differently, they items will be subject to VAT.
3. Introduction of Exemptions on various products.
Some goods under the new law now enjoy a VAT exemption status. These include, Mosquito Repellent nets & items used for their production, electric bicycles and buses, and inputs for the manufacture of animal feeds.
4. Removal of Exemption for various products.
Conversely, certain goods that were enjoying exemptions are now subject to a standards 16% VAT. These include discs and smart cards used in the medical field, woven fabrics and textiles, as well as goods used exclusively for oil, mining, prospecting and geothermal activities.
The Income Tax Act.
Some of the changes to the Income Tax Act include:
1. Net loss redemption capped at 5 years.
Previously, an individual or company could carry forward their net losses into subsequent years while declaring their tax liabilities for an unlimited number of years until their losses were offset.Under the current law, the loss can only be carried forward for 5 years. This means that capital intensive businesses which are unable to offset all their losses within 5 years will lose the relief from the tax burden.
2. Deduction on expenses for construction of public sports facilities.
The new law has introduced allowable defections for any expenditure incurred in the construction of public sports facilities.
3. Review of the Significant Economic Presence Income Tax on Digital Service Providers.
The tax previously had an exemption for entities that had a turnover of less than Kshs. 5 Million. The exemption has now been removed making all transactions subject to the tax. Additionally, the tax has been halved from 3% to 1.5%.
4. Introduction of exemptions/benefits to companies licensed by the Nairobi International Finance Centre.
The following benefits have been introduced for various companies:
i. All licensed startups are subject to a reduced income corporate income tax of 15% for the first 3 years of incorporation and 20% for the subsequent 3 years.
ii. All businesses are subject to a tax rate of 15% for the first 3 years of operation and 20% for the subsequent 3 years if; it invests at least Kshs 3 Billion within its first 3 years; or it is a holding company and 70% of its senior leadership comprises of Kenyan citizens
The Miscellaneous Fees & Levies Act
1. Introduction of Exemptions.
The law has introduced an exemption on the Rail Development Levy and Import declaration fee on mosquito nets and any input used in their production.
2. New taxable products.
The law has included the goods subject to taxation under the Act, including ceramic products at the rate of 3% and iron ingots and non iron alloys at the rate of 17.5% of the customs value
Other Changes in Tax Procedures and Requirements
Under the Finance Act 2025:
- All goods imported into Kenya will require a valid certificate of origin
- Micro-Distillers have been clearly defined and exempted from the requirement of automation, installation of cameras and continuous piping, all intended to curb tax cheats
- The timeline for the Commissioner of Domestic Taxes to render a decision on tax refunds has been increased from 90 days to 120 days without a refund audit and from 120 days to 180 days with a refund audit exercise.
- The Kenya Revenue Authority has been empowered to issue Agency Notices to Non-residents, an expansion of its previous powers that only allowed it to issues the notices to residents
