Members of Parliament have ignored calls to overhaul the current Pay As-You Earn (PAYE) framework by reducing the highest marginal tax rate from 35 percent to between 28 and 30 percent, despite sustained pressure from experts in the financial sector.
However, even as MPs shelved the proposed PAYE reforms, the National Assembly Finance and National Planning Committee recommended changes to the Finance Bill 2026 that would significantly dilute some of the more punitive tax measures proposed by the National Treasury.
If adopted by the House, the committee’s recommendations would reduce the amount of additional revenue expected from the Bill, potentially forcing the government to borrow more to finance the Sh4.82 trillion budget for the 2026/27 financial year.
The Finance Bill, as published, is projected to raise an additional Sh120 billion. However, the committee, chaired by Molo MP Kuria Kimani, estimates that its proposed amendments would lower the projected revenue yield to Sh98.5 billion.
During public participation on the Bill, the Institute of Certified Public Accountants of Kenya (ICPAK), the Kenya Bankers Association (KBA), Deloitte and Touche, among others, proposed the introduction of a new clause exempting Kenyans earning below Sh30,000 per month from PAYE.
The proposal was consistent with President William Ruto’s earlier pledge to cushion low-income earners from income tax. However, the committee declined to adopt it despite acknowledging that numerous stakeholders had made similar submissions seeking a review of the PAYE bands.
"The committee therefore recommended that the National Treasury explore the proposal with a view to addressing stakeholders' concerns," the report states, effectively postponing the issue.
The committee argued that the Treasury was still exploring ways of improving progressivity in the personal income tax system without causing a significant reduction in government revenues.
The proposal sought to raise the tax-free threshold from Sh24,000 to Sh30,000 per month and increase personal relief from Sh2,400 to Sh3,000.
Cabinet Secretary for the National Treasury and Economic Planning John Mbadi (centre), with chairperson of the National Assembly Budget and Appropriations Committee Samuel Atandi (right), and chairperson of the National Assembly Finance and National Planning Committee Kuria Kimani at Parliament Buildings, Nairobi on June 11, 2026 before the presentation of the Financial Year 2026/27 budget highlights.
Photo credit: Dennis Onsongo | Nation Media Group
They submitted that revising the PAYE framework would improve household purchasing power, stimulate consumer spending, support Small and Medium-sized Enterprises (SMEs) dependent on consumer demand and align with the government’s Medium-Term Revenue Strategy (MTRS) objectives on equity and economic growth.
“Kenya’s PAYE tax bands are narrow and steep, with high marginal rates applying at much lower incomes than in peer countries,” KBA Chief Executive Officer Raymond Molenje said in a memorandum to the committee. “A five per cent PAYE cut expands the economy, creates jobs and increases the country’s tax revenue.”
The push is anchored in the fact that employees face the burden of additional taxes and levies on gross income, such as the Social Health Insurance Fund (SHIF), the affordable housing levy, and the enhanced National Social Security Fund (NSSF), which have led to a decline in real wages.
Currently, SHIF attracts a monthly tax of 2.75 per cent of gross pay, an affordable housing levy at 1.5 per cent of monthly gross pay with employers matching the same, and enhanced NSSF contributions of Sh6,480 effected in February 2026.
A simulation undertaken by KBA shows that a uniform five per cent reduction in PAYE across all the income bands will release Sh28.1 billion into the economy annually, generating Sh42 billion “in immediate GDP output”, creating 36,000 new jobs annually, and unlocking Sh140 billion in formal lending capacity.
The bankers’ association further notes that if the PAYE rate were to be reduced by five per cent, the resultant effect would be the generation of between Sh27.1 billion and Sh31.5 billion in additional revenues, the recovered revenue loss caused by the reduction in the first year.
The current monthly individual PAYE rates are such that on the first Sh24,000 earned a month, 10 per cent is charged, escalating to 25 per cent on the next Sh8,333, on the next Sh467,667, 30 per cent is charged, 32.5 percent on the next Sh300,000, and 35 per cent on all income over Sh800,000.
If the KBA proposal goes through, 10 per cent shall be charged on the first Sh30,000, 20 per cent on the next Sh8,333, 25 per cent on the next Sh461,667, 27.5 per cent on the next 300,000 and 30 per cent on amounts over Sh800,000 in the tax bands.
FCPA Robert Waruiru, the convenor of the Public Finance Taxation Committee at ICPAK, notes that a reduction in the marginal PAYE rate and the expansion of the PAYE bands to enhance progressivity would be in line with the government’s policy objectives under the Medium-Term Revenue Strategy (MTRS).
“With higher deductions such as NSSF, affordable housing levy and SHIF contributions over the last two years, a more progressive tax rate would help increase disposable income among individuals,” Mr Waruiru said.
“This would in turn enhance their purchasing power, savings and investment capacity; and consequently, spur economic growth.”
ICPAK argues that the proposed amendment would also align “our PAYE regime compared to Kenya’s peers in Africa- Ghana and South Africa.”
For instance, Ghana has 0 per cent, five per cent, 10 per cent, 17.5 per cent, 25 per cent, 30 per cent, and 35 per cent, with much wider tax bands. ICPAK notes that the 30 per cent rate applies to a monthly income of above Sh255,000 in Ghana, as opposed to Sh32,333 in Kenya.
Among the proposals by the parliamentary committee is a departure from the Bill’s proposal to reclassify certain essential goods, supplies and services from VAT zero-rated to VAT exempt status.
The affected items included transportation of sugarcane from farms to milling factories, inputs of raw materials used in the manufacture of animal feeds, locally assembled and manufactured mobile phones, electric motorcycles, electric buses, electric bicycles, solar and lithium-ion batteries.
But even as the committee proposed the changes, it agreed with the National Treasury proposal to move Mitumba from the zero-rate category to the tax-exempt list and the imposition of five per cent income tax on Mitumba earnings, which will make the second-hand clothes expensive.
The committee further agreed with the National Treasury to expand withholding tax obligations on digital payments and card-related transactions, which will increase the cost of electronic payment systems.
The committee observed that the items proposed for migration from zero-rated status to tax-exempt status were recently granted zero-rated status under the Finance Act 2023 “to support local manufacturing and reduce the cost of essential goods.”
“Reversing this position would increase production costs, discourage investment and undermine predictability in the tax system as well as the objectives of that reform and create uncertainty in the framework,” the committee’s report reads.
The committee reasoned that transferring selected goods and services from VAT zero-rated status to VAT exempt status would deny businesses the ability to recover input VAT, costs that are likely to be passed on to consumers through higher prices of phones.
The committee made the finding while acknowledging the concerns raised by stakeholders during the public hearings on the Bill.
It established that rationalising VAT exemptions on the transportation of sugar will increase transportation costs.
“Transportation of sugarcane from farms to milling factories, as maintaining the zero-rated status of sugarcane transportation supports the government’s agenda of revitalising the sugar industry by allowing farmers to recover input VAT and avoid additional costs,” reads the committee’s report on the Bill.
“Exempting the service would shift the VAT burden to farmers, increase transportation expenses, reduce investment in farm inputs, and potentially discourage sugarcane production.”
The Kimani-led committee recommended the deletion of the proposal moving electric bicycles, electric buses, solar batteries and lithium-ion batteries from zero-rated to exempt status as requested by KPMG in a memorandum.
“The amendment may increase costs of environmentally friendly transportation and energy products, thereby discouraging adoption of sustainable energy solutions and undermining Kenya’s green economy agenda.”
President Ruto has been pushing for green energy; therefore, moving the goods to the tax-exempt category goes against his vision.
The committee also acknowledged the concern raised by the Pharmaceutical Society of Kenya (PSK) on the cost implications of zero-rating versus exempting products.
Rationalising VAT exemptions on selected inputs or raw materials locally manufactured for animal feeds and pharmaceuticals would increase the cost. Therefore, the committee recommended deletion of the proposal.
Cabinet Secretary for the National Treasury and Economic Planning John Mbadi presents the Financial Year 2026/27 budget highlights at Parliament Buildings, Nairobi on Thursday, June 11, 2026.
Photo credit: Dennis Onsongo | Nation Media Group
To ease pressure across the manufacturing value chain, the committee has recommended the deletion of a proposal from the Bill imposing excise duty on locally made plastic packaging bags.
This, as the committee agreed with the National Treasury to apply excise duty on imported articles of plastic.
The packaging materials are widely used as industrial and commercial inputs across multiple sectors, including food and beverage, pharmaceuticals, cosmetics, agriculture and household consumer goods.
“Subjecting such materials to excise duty substantially increases production and packaging costs, which are ultimately passed on to consumers through higher retail prices,” the committee says.
The committee, however, disagreed with stakeholders pushing for the deletion from the Bill of a proposal seeking to increase excise duty on fruit juices.
The committee argues that the magnitude of the increase is substantial and is likely to have a direct impact on the pricing and competitiveness of juice products within the local market.
The committee is of the view that the proposal seeks to isolate sugar-sweetened beverages from other non-alcoholic drinks and increase excise duty from Kes14.14 to Kes20 per litre to better reflect health risks and improve revenue.
Sugar-sweetened beverages are currently taxed at the same excise rate as other non-alcoholic drinks, regardless of sugar content, meaning the tax structure does not reflect their higher health risks.
This uniform and relatively low rate, according to the committee, fails to discourage consumption of high-sugar products, contributing to rising cases of obesity and other non-communicable diseases. This, while also falling short of international best practices that use targeted taxation to influence healthier consumption patterns and support public health objectives.
The committee further noted the concerns raised by the ICPAK on the imposition of taxes on digital payments.
“While concerns on implementation were raised, these can be addressed administratively and do not justify deletion of the clause, as the amendment targets taxable payments within digital payment systems rather than ordinary consumer transactions such as mobile money and therefore the proposal was not supported,” the committee said.
The MPs Bill proposes to shift excise duty liability on mobile phones from the point of importation or factory removal to the point of activation, linking the tax point to when the device becomes operational within the country.
It also proposes to increase excise duty on mobile phones from 10 percent of customs value to 25 percent of excisable value, broadening the tax base.
On excise duty applicable to mobile phones, the Committee observed that the current framework requires payment of excise duty at importation or upon removal from the factory for locally manufactured phones.
Following engagement with stakeholders, the committee observed that imposing excise duty on mobile phones at the point of activation would create significant compliance challenges, delay revenue collection, and create uncertainty for consumers.
“The committee therefore recommended that the proposal be deleted, noting that further policy review and stakeholder consultation would be required before implementation.”
