Businesses can now breathe a sigh of relief following the decision by legislators to allow for the extension of five years for losses incurred and carried forward.

Previously, the losses were being carried forward indefinitely, however, in the proposed Finance Bill of 2025/26, the National Treasury had proposed to limit this to a period of five years in a bid to raise more revenue to fund the current Ksh4.2 trillion budget that has a deficit of more than Ksh900 billion.

With the previous proposal, the government argued that the indefinite limit has created challenges in verifying such losses, as taxpayers are only required to retain records for five years, the same period within which the Commissioner may amend a tax return.

Through a document presented to parliament by the National Assembly Committee on Finance and National Planning Chairman, Kimani Kuria, indicated that an extension can now be granted if an application by a business is submitted.

“To ensure consistency between the record-keeping period and the carry-forward period for losses, the Bill proposes to limit the carry-forward of losses to five years. The Committee, however, amended this proposal to allow for an additional extension of up to five years, upon application,” he said.

A carry-forward loss is a loss that is usually extended into the following financial year by a business which limits the tax that is charged on the profits made in that particular year.

For instance, if a business incurs a loss of Ksh1 million and then in the following year gets a profit of about Ksh1.5 million, only Ksh0.5 million should be taxable, hence reducing the taxable income.

During a public participation exercise on the proposed Finance Bill, businesses such as the East African Breweries Ltd (EABL) came out boldly to oppose the adoption of the bill, arguing that it would impact businesses, especially ones that have high capital expenditures.

In their submission, the company explained that this impact would result in income tax deficits owing to significant capital allowances that could extend beyond five years.

They added that companies that had significant historical losses would be severely impacted owing to past inefficiencies that have since been restructured and are now on a profit streak.

“For such companies, the historical losses should be allowed indefinitely provided that no new losses are being accrued,” EABL said further arguing that “the clause would impact current and future start-ups given that most businesses in Kenya break even way beyond five years. This may discourage the opening and running of new businesses.”

The alcohol manufacturer also argued that market distortion is brought about by the fact that in Tanzania, carry forward of losses is indefinite, while in Uganda, it is seven years, with the subsequent 50 per cent of the deficit being allowed indefinitely in succeeding years.

In light of this, they proposed the deletion of the clause or extension to 10 years, a proposal which has now been given a nod, an additional five years.

“Rescind the clause in its entirety in the Finance Bill 2025. Alternatively, the clause should be limited to 10 years and reworded to read that it will only impact losses arising from the date of enactment into law/current period and go forward,” EABL proposed.