The Finance Act 2025 is a transitional framework—its short-term burden is meant to stabilize revenue and restore fiscal credibility, while its medium- to long-term incentives target investment, sustainability, and digital growth. If effectively implemented and coupled with public trust-building measures, its full economic impact could span 5–10 years, shaping the next decade of Kenya’s economic strategy. In this article, we take a deeper look at the effects already happening after the Bill was signed into law just under one month ago.
Income Tax Act
The Act amended the Income Tax Act to increase the per‑diem threshold, stating that:
“The words ‘two thousand shillings’ are deleted and substituted with the words ‘ten thousand shillings’” (Section 5(2), ITA).
This change exempts KES 10,000 per working day for mobile employees, simplifying compliance and reducing tax burdens for business travelers—though it may increase payroll costs for some firms.
On pension and gratuity, the law clarifies that:
“gratuity and other allowances paid… under public pension schemes” are fully exempt—and expanded to include private schemes by repealing subsections (4) to (9A) of Section 8, while also replacing “husband” with “spouse” in tax definitions.
This broadens retirement income security across public and private sectors.
The Act also introduces advance pricing and caps tax loss relief, adding Section 18F:
“Advance Pricing Agreements… providing for voluntary agreements… up to five (5) years” becomes part of the Income Tax Act.
While APAs provide transfer‑pricing clarity (effective Jan 1, 2026), businesses face new compliance demands. Simultaneously, the Act restricts loss carry‑forwards:
“tax losses… be carried forward for a maximum of five (5) years.”
This hurts capital intensive sectors such as energy, construction and manufacturing.
Digital & Related Taxes
The Finance Act reversed the Digital Asset Tax (DAT), now stipulating:
“Deleted the provisions relating to digital assets tax… Instead, excise duty at the rate of 10% shall be applicable on the fees charged by the owner of a platform for the transfer of the digital assets.”
This excise duty streamlines taxation of digital asset transfers but introduces platform-level compliance. Earlier proposals to reduce DAT to 1.5% were dropped, as the late changes show full repeal of DAT in favour of excise.
Excise on betting, gambling and lottery to reduced from 15% to 5%, raising concerns among responsible gambling advocates.
Nairobi International Financial Centre (NIFC)
The Act incentivizes investment via NIFC certification:
“Reducing the corporate income tax rate to 15%… for start‑ups certified by the NIFC” and “reducing…15% for the first ten (10) years and to 20% for the subsequent ten (10) years… invests at least Kenya Shillings three billion…”
Additionally:
“Exemption for dividends paid… should such a company reinvest…two hundred and fifty million (KES 250,000,000).”
These provisions aim to attract global capital and develop Nairobi as a financial hub, though entry thresholds may limit uptake. However, it targets long-term transformation, encouraging large investors to create employment opportunities and make Kenya a manufacturing hub within the region.
Fringe Benefits & Withholding Tax (WHT)
Fringe benefits are taxed under a flat rate:
“The Bill proposes to include a tax rate of 30% on fringe benefits.”
And qualifying interest/dividends are now explicitly final:
“Resident withholding tax rates of 5% and 15%… shall be a final tax.”
This clarity helps employers and investors, but a flat fringe benefit tax is already increasing payroll costs.
VAT & Excise Measures
The Act grants VAT exemption on clean-tech and packaging inputs:
“Expansion of the scope of exempt goods to include packaging materials for tea and coffee.”
It also zero‑rates items:
“The supply of electric bicycles… the supply of solar and lithium‑ion batteries… the supply of motorcycles with electric motor…”
These green incentives support sustainable growth but reduce short-term VAT revenue.
Conversely, the Bill removed VAT exemptions on affordable housing and energy projects, potentially increasing construction costs.
Excise law now defines digital lenders more broadly:
“Digital lender… excludes banks, SACCOS and micro‑finance institutions” (from digital lending definition under Excise Duty Act).
Sector-based impact
Manufacturing & Exports gain from VAT relief on packaging and clean tech, but loss‑carry limits can raise effective tax rates and weaken investment dynamics.
Financial & Digital Sectors get structure with APAs and excise-based DAT, yet face compliance demands and platform-level responsibility.
Housing & Infrastructure may suffer due to repealed construction allowances and VAT benefits, undermining affordable development.
Retirees & Trusted Employees see wins via per‑diem and gratuity exemptions, but fringe‑benefit tax is a new expense for employers.
What Was Proposed but Dropped
Several initially suggested taxes were omitted from the final Act, giving kenyans a necessary breather:
- Abolished VAT on bread, sugarcane transport, FX transactions, and financial services.
- Cancelled a 2.5% motor vehicle tax and 20% mobile‑money excise.
- Removed VAT on eggs, potatoes, onions, previously opposed in 2024 protests.
- Scaled back “eco‑levy” proposals on plastics and imports.
- Dropped the shift allowing KRA unrestricted personal data access—which was reversed during parliamentary debate.
Outlook for Coming Months
In the next few quarters, expect broadened tax bases via APAs and excise structures, increased foreign direct investment into NIFC‑certified firms, and mixed effects: exporters benefiting from VAT cuts, while housing and energy investments face tighter tax frameworks. Businesses must prepare for enhanced compliance and KRA oversight, especially around digital platforms and loss‑carry.
Duration of Economic Impact
1. Short-Term (0–12 months)
- Price increases in certain sectors: The removal of VAT exemptions (e.g., for housing inputs) and introduction of fringe benefit tax will immediately increase the cost of doing business for some employers and developers.
- Increased tax compliance costs: Businesses, especially those in digital services, will spend the next few months adapting to new systems like APAs, excise on digital assets, and limits on loss carry-forward.
- Revenue boost to government: The introduction of more structured tax rules and broadened definitions (e.g., digital lending) will likely increase KRA’s collections in FY2025/26.
2. Medium-Term (1–3 years)
- Investor sentiment may improve, especially due to incentives under the Nairobi International Financial Centre (NIFC), zero-rated green energy items, and stamp duty exemptions on internal corporate restructures.
- Sectors like manufacturing and clean tech will benefit from VAT relief on key inputs, which could stimulate local production and exports by late 2025 or early 2026.
- Real estate and infrastructure growth may slow, especially if VAT on materials and loss limitation policies make long-term investment less attractive.
3. Long-Term (3–10 years)
- NIFC tax incentives (offering 15–20 years of reduced corporate tax) are designed to attract long-term capital. If successful, this could position Nairobi as a regional financial hub by 2030.
- Environmental and digital transitions encouraged by tax policy—like e-mobility and solar adoption—will support Kenya’s green economy ambitions.
- Public debt sustainability may improve if enhanced compliance and revenue lead to lower borrowing, meeting the government’s goal of reducing the deficit to 4.5% of GDP in FY2025/26.
Conclusion
The 2025 Finance Act adopts a balanced stance: incentivizing high-growth sectors while tightening long-term tax leakages. Short-term reliefs (per diem, gratuity) aim to calm public unease, while retention of data privacy provisions marks a subtle victory for civil rights. For investors and businesses, success will hinge on navigating new compliance standards—especially around digital assets, APAs, and tax-loss limitations.
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