Developers participating in the government's affordable housing programme are set to face higher construction costs following the reclassification of goods imported or purchased locally for direct and exclusive use in affordable housing projects from value-added tax (VAT)-exempt to standard-rated supplies.
The change means that construction materials and other qualifying inputs such as cement and steel used in affordable housing schemes will now attract the standard 16 percent VAT, reversing a tax incentive that had been introduced to lower development costs and support delivery of low-cost housing units.
Standard-rated supplies are goods and services subjected to a 16 percent VAT, while exempt goods face no tax on the final sale.“Goods imported or purchased locally for the direct and exclusive use in the construction of houses under an affordable housing scheme approved by the Cabinet Secretary on the recommendation of the Cabinet Secretary responsible for matters relating to housing.
“The proposal seeks to remove VAT exemptions and applies the normal VAT rate to several previously exempt sectors. The likely implications are: increased costs for aviation, tourism, housing, and donor-funded projects. This will likely lead to higher prices for consumers and investors and may also slow investment and affordable housing development,” said KPMG in their analysis report of the Finance Bill 2026.
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The move is likely intended to address the confusion created by VAT exemptions, which often prevent firms from claiming input tax credits.
Under the standard-rated regime, developers will be able to recover VAT incurred on their purchases, potentially improving tax efficiency across the construction value chain.
The proposal, if passed, is expected to raise concerns about increased financing requirements and cash flow pressures for developers, particularly during the construction phase when significant volumes of materials are procured.
Additionally, any increase in project costs could ultimately be reflected in house prices, potentially undermining efforts to make homes more affordable for low- and middle-income earners.
The affordable housing programme is one of the government's flagship initiatives aimed at reducing the country's housing deficit through the construction of thousands of housing units across major urban centres.
Speaking in Parliament while reading the 2026/2027 budget, National Treasury Cabinet Secretary John Mbadi said a total of 277,281 housing units have been completed or are under implementation nationwide as at May 2026.
He also proposed an allocation of Sh143.7 billion to the housing sector in the 2026/2027 national budget, representing an increase of Sh15.4 billion compared to Sh128.3 billion set aside last year.
“To sustain this momentum, I propose Sh143.7 billion for the housing, urban development and public works sub-sectors,” he said.
Housing development encompasses construction of affordable houses in a bid to close the gap between supply and demand, slum upgrading projects, and the construction of public participation social hall centres.
Other programmes under housing include the development and enforcement of planning and zoning regulations, integrated roads, bus and rail infrastructure, and water supply and waste management.
