EXPLAINER: Treasury answers questions on Finance Bill, 2025

The government has moved to correct wrongly held misconceptions about the Finance Bill, 2025, ahead of the reading of the 2025/25 Budget estimates on June 12, 2025.

In a detailed document released to the media on Saturday, June 7, 2025, the National Treasury mandarins laid bare responses to some of the critical questions by Kenyans.

The document focuses on some of the misinterpreted issues as noted during public discourse since the Finance Bill, 2025, was tabled.

Here are the responses to some of the questions on the Finance Bill, 2025:

Q. Why was the VAT Registration threshold set at Sh5 million?

A.Value Added Tax (VAT) was introduced in Kenya in 1990 to replace the former sales tax system, which was narrow in scope and resulted in cascading taxation. VAT is a broad-based consumption tax designed to be borne by the final consumer and applied at each stage of the supply chain on the value added.

To balance revenue collection with administrative efficiency, the VAT Act requires any person making or expecting to make taxable supplies of Sh 5 million or more in a 12-month period to register for VAT. The same provision mandates non-resident suppliers of imported digital services to register regardless of turnover.

The Sh 5 million threshold, last revised in 2007 from Sh 3 million, was intended as a policy and administrative tool to:

a) Cushion small and micro enterprises from the cost and complexity of VAT compliance;

b) Reduce the administrative burden on the tax authority by focusing on high-turnover entities;

c) Support business growth by allowing small firms time to scale before becoming VAT-liable.

However, over time, inflation and economic growth have eroded the real value of this threshold. This has led to disproportionately high compliance costs for small businesses and increased administrative demands on the Kenya Revenue Authority (KRA).

To address these concerns, the Finance Bill, 2024 proposed raising the threshold to Sh 8 million, but the proposal was not implemented following the withdrawal of the Bill.

The Medium-Term Revenue Strategy (MTRS) affirms the Government’s intention to review the VAT threshold. The goal is to enhance administrative efficiency, ease the burden on small taxpayers, and allow voluntary registration for those who benefit from input tax claims or formal trading relationships.

Q. What is the rationale for Turn Over Tax banding

A. Turnover Tax (TOT) is a simplified presumptive tax regime provided under Section 12C of the Income Tax Act, designed for resident persons—both individuals and companies— whose annual business turnover exceeds Sh 1 million but does not exceed Sh 25 million.

It is important to note that TOT does not operate under a banded rate structure.

Unlike Personal Income Tax, which applies graduated tax bands based on income levels, TOT is charged at a flat rate of 1.5% on gross turnover, regardless of where a taxpayer falls within the Sh 1 million to Sh 25 million range. There are no progressive tax bands within this regime.

The key policy objectives of TOT are to:

a) Simplify tax compliance for small businesses with modest turnover;

b) Lower the cost of tax administration for both the taxpayer and the Kenya Revenue Authority (KRA); and

c) Encourage formalization of businesses that might otherwise remain outside the tax net.

TOT is also optional. Under Section 12C(2), any qualifying taxpayer may elect in writing to opt out of TOT and instead be assessed under the ordinary income tax regime, which includes standard rates, PAYE bands and allowable deductions, reliefs depending on whether the income belongs to an individual or a company.

Furthermore, TOT is not applicable to certain income types, including rental income, management or professional fees, and income subject to final withholding tax.

Given these characteristics, flat rate, gross-based assessment, broad eligibility (individuals and companies), and opt-in flexibility. Introducing income banding within the TOT regime would undermine its simplicity and confuse its purpose.

Banding may also blur the distinction between TOT and standard income tax, leading to unnecessary administrative complexity.

In conclusion, banding is not provided for in law, and maintaining the flat-rate structure is consistent with TOT's objective as a low-cost, accessible compliance tool for small businesses.

Q. What is the value of effecting these amendments now rather than suspending the effectiveness dates

A. The Finance Bill, 2025 proposes that the majority of its provisions take effect on 1st

July 2025, with specific exceptions—sections 12 and 56, which are scheduled to commence on 1st January 2026. The rationale for the immediate effectiveness of most provisions is both fiscal and structural.

The proposed amendments are not solely revenue-raising in nature; they serve a broader strategic purpose, including:

a) Financing the FY 2025/26 Budget

The Finance Bill, 2025, is a key fiscal instrument supporting the implementation of the FY 2025/26 budget, which also commences on 1st July 2025. Delaying the effective dates of the revenue measures would result in a financing gap, undermine budget credibility, and constrain the Government’s ability to implement planned development and recurrent expenditure.

b) Clarifying Legal Provisions

Certain amendments seek to clarify the law, particularly in areas where there has been judicial interpretation or administrative uncertainty. For example, the treatment of validated VAT refunds and their utilisation by taxpayers has been subject to court decisions. Prompt legislative clarification will provide certainty to taxpayers and the Kenya Revenue Authority (KRA), improving compliance and reducing disputes.

c) Streamlining and Cleaning Up Tax Law

The Bill also proposes to repeal outdated or redundant provisions, such as penalty clauses in the Income Tax Act that are already addressed under the Tax Procedures Act. These clean-up amendments eliminate duplication, reduce legal ambiguity, and promote a more coherent legal framework.

d) Aligning with International Tax Standards

Kenya is a signatory to several global tax cooperation frameworks. Some amendments align the country with international best practices and fulfil commitments under multilateral agreements:

• The introduction of a Global Minimum Tax ensures Kenya can collect its fair share of tax from large multinationals. Failure to implement this measure would allow other jurisdictions to tax profits earned in Kenya.

• Provisions on Country-by-Country (CbC) reporting strengthen Kenya’s position in fighting tax avoidance through enhanced transparency and information exchange, consistent with obligations under the Global Forum.

e) Enhancing Compliance and Enforcement Capacity

Several provisions are aimed at boosting the enforcement powers of KRA, including the integration of tax systems with financial institutions to improve third-party data access. These changes are vital for closing compliance gaps and tackling tax evasion.

Delaying them would hinder reforms critical to modernizing tax administration.

Implementing the majority of the provisions in the Finance Bill, 2025, from 1st July 2025 is necessary to:

• Ensure timely financing of the FY 2025/26 budget,

• Provide legal certainty and alignment with judicial rulings,

• Streamline and modernize Kenya’s tax laws,

• Fulfil international obligations, and

• Strengthen domestic revenue mobilization through enhanced compliance.

Suspending their effectiveness would defer these important reforms and undermine the fiscal and legal objectives the Bill seeks to achieve.

Q. Why special economic Zones and Investment Deductions for Special Economic Zones (SEZs)

A. The Special Economic Zones Act provides for the establishment of both customs-controlled and non-customs-controlled areas within SEZs. Tax incentives, including exemptions from customs duties and VAT, apply primarily within customs-controlled areas, while non-customs-controlled areas are not intended to benefit from such incentives.

Under current practice, an accelerated investment deduction of 100% has been claimed not only by licensed SEZ developers, operators, and enterprises but also by non-SEZ entities operating within or near the zones. This has led to an unintended extension of the incentive to businesses not formally licensed under the SEZ framework, resulting in unfair tax treatment and potential revenue losses.

In contrast, businesses outside SEZs are required to deduct investment costs gradually through investment allowances over several years under the Income Tax Act. This disparity undermines tax equity and creates room for policy abuse.

To address this, the Finance Bill, 2025 proposes to restrict the 100% investment deduction strictly to licensed SEZ developers, operators, and enterprises, and not to the geographic zone itself. This amendment aims to:

• Close existing loopholes that allow ineligible businesses to access SEZ tax benefits,

• Safeguard revenue, and

• Uphold the integrity of Kenya’s investment incentive framework.

Additionally, the Bill proposes to clarify that exemptions on property transfers apply exclusively to licensed SEZ entities, further reinforcing the principle that incentives are tied to licensing status, not location alone.

Q. What is the Balance between supporting the users/owners as far as Significant Economic Presence Tax matters go in line with the BETA agenda

A. The Significant Economic Presence Tax (SEPT) is a tax measure introduced under the Income Tax Act to ensure that non-resident digital service providers who generate income from Kenyan users contribute to the local tax base. As provided by law, SEPT applies where:

• The service is delivered over a digital marketplace, and

• The user of the service is located in Kenya, regardless of whether the provider has a physical presence.

The tax is computed on a deemed profit margin of 10% of the provider’s gross turnover, and is payable monthly, by the 20th day of the following month.

Importantly, SEPT does not apply to:

• Non-residents operating through a permanent establishment in Kenya;

• Income already chargeable under Sections 9(2) or 10 of the Act;

• Providers serving airlines with 45% or more Government shareholding;

• Non-resident digital businesses with an annual turnover below Sh 5 million.

Alignment with the BETA Agenda

Under the Bottom-Up Economic Transformation Agenda (BETA), the Government has prioritised digital infrastructure and innovation, including investments in broadband, e-commerce, and digital literacy. These initiatives are aimed at enabling Kenyans to earn and benefit from the digital economy.

The introduction of SEPT is not designed to tax Kenyan consumers, but rather to ensure that multinational digital firms, which profit from Kenya’s digital infrastructure and user base, contribute fairly to the development of the same ecosystem. This aligns with the principles of equity, fiscal sovereignty, and responsible taxation.

International Practice SEPT is not unique to Kenya. Similar taxes have been enacted in India, Colombia, Nigeria, and other jurisdictions, particularly where global tax rules do not adequately capture the economic value created by user participation in digital platforms.

Conclusion

SEPT strikes a balance between:

• Encouraging digital service access and innovation for Kenyan users, and

• Ensuring fair contribution by non-resident digital businesses benefiting from Kenya’s economy and infrastructure.

It is a progressive tax measure that supports the BETA agenda without undermining the growth of the digital economy.

Key positive tax measures in the Finance Bill, 2025, Income Tax

1) Increase in daily subsistence allowance not subject to tax for the private sector from 2,000 to 10,000 shillings

2) Clarification that gratuity, whether paid by public or private employer,s is exempt from tax

3) Allowing 100% deduction in the first year of use for all the loose tools like utensils, linen, spanners, etc.

4) Allowing deduction of interest ona  mortgage taken to construct a house

5) Power granted to the Commissioner to enter into an Advance Price Agreement with a multinational for certainty in transfer pricing

6) NIFCA-certified companies, including startup,s to enjoya reduced corporate tax rate of 15% for the first 10 years and 20 % in the subsequent years

7) Reduce digital asset tax from 3% to 1.5%

8) Compelling employers to deduct eligible deductions and tax relief when computing tax payable by employees.

9) Automatic approval of the request to change the accounting date if the

Commissioner fails to respond to the taxpayer’s request within six months from

2. VAT Exempt

1) Exempt packaging materials for coffee and tea

2) Reduce the time period for applying VAT on bad debts from three years to two years

3. Exercise Duty

1. Reduce excise duty on ethanol above 90 per cent alcohol content per litre to be purchased by licensed producers of spiritous spirits.

2. The commissioner is to make a decision to accept or reject the application for a license to manufacture excise goods within 14 days of receipt of a valid document.

3. Remove double taxation on fees charged by digital lenders, banks, SACCOs and Microfinance Institutions

4. Tax Procedures

1) The commissioner is to give reasons for additional tax assessments

2) Power granted to the Cabinet Secretary power to waive penalties and interest arising from System errors of the Kenya Revenue Authority.

3) Clarification that the withholding agent who has failed to withhold tax will be liable only for penalties for not withholding the tax payable, but not for both the tax not withheld and the penalty, when the recipient has paid the full tax payable on the payment received.

Miscellaneous Fees and Levies Act

Reduction of Export and Investment Promotion Levy on billets and wire rods which is a major raw material for steel products.