A tractor ploughs a farm in Elburgon, Nakuru County. The Treasury is proposing to remove inputs and raw materials used in the manufacture of drugs and animal feed, as well as sugarcane transportation, from the list of zero-rated items.
Healthcare providers and farmers are some of the people who will take a hit should a fresh proposal by the National Treasury to introduce the 16 per cent value-added tax (VAT) be passed.
Through the Finance Bill 2025, Treasury Cabinet Secretary John Mbadi has proposed to remove inputs and raw materials used to manufacture drugs and animal feed as well as transportation of sugarcane from the list of items that are zero-rated.
Zero-rated items are subject to VAT at a rate of 0 per cent. This means that, unlike VAT-exempt items, they are technically considered taxable supplies. However, businesses dealing with them can still claim input tax credits. Thus, no VAT is charged to the consumer at the point of sale.
However, in the proposed amendments, the Treasury has expunged these items from the zero-rated schedule, which means suppliers will be forced to pass on the cost to the consumer should it become law. This is likely to increase the cost of food and healthcare.
In the proposed changes, the Treasury wants Parliament to delete eight provisions of Part A of the Second Schedule of the Value Added Tax, which is on zero-rated supplies.
President William Ruto’s government also appears to be moving away from plans to encourage e-mobility, with the Treasury proposing to introduce 16 per cent VAT on electric buses. The green initiative will also take a hit after the government proposed to introduce a sales tax on solar and lithium batteries.
The supply of electric bicycles has also been subjected to 16 per cent VAT in the first Finance Bill by Mbadi, who was appointed the CS for Treasury following the rejection of the Finance Bill 2024 through violent youthful protests.
Manufacture and assembly of mobile phones have also been removed from the zero-rating schedule.
By reducing the number of items under the zero-rated schedule, the government hopes to slash its expenditure on tax refunds. However, critics fear that some of the items are essential to Kenyans and that subjecting them to VAT will only raise the cost of living.
In a statement, the Cabinet noted that the Bill seeks to minimise tax-raising measures.
“Instead, it aims to enhance tax administration efficiency through a new legislative framework,” said the Cabinet on Tuesday.
“Key provisions include streamlining tax refund processes, sealing legal gaps that delay revenue collection, and reducing tax disputes by amending the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act,” added the Cabinet.
In changes made in the current financial year through the Tax Law (Amendment) Act, the government introduced VAT on raw materials and inputs used to manufacture pesticides and fertilisers, a move that pushed up the cost of production among farmers.
Because agricultural products are critical for crop production, the government has long zero-rated to shield consumers from the high cost of food products. For many Kenyans, especially the poor, food takes up close to half of their expenditure.
Official data show that fertilisers and chemicals take up a huge chunk of the total cost of agriculture production.
Fertilisers were valued at Sh30.1 billion while crop chemicals used in agricultural production amounted to Sh17.89 billion. The sum of the two, Sh48 billion, was close to half the Sh97.78 billion worth of material inputs used in 2023.
