Local industries dealing in select zero-rated products can now breathe a sigh of relief as legislators retain the status to enhance tax predictability.

In the proposed Finance Bill 2025/26, the government was seeking to move the items from the zero-rated status to exempt in a bid to raise more taxes.

Businesses dealing with locally assembled and manufactured products, motorcycles under tariff number 8711.60.00, electric bicycles, solar and lithium-ion batteries are to be affected.

Tariff heading 87.02

The list also includes electric buses under tariff heading 87.02, inputs or raw materials, whether locally purchased or imported for the manufacture of animal feeds and Bioethernal Vapour (BEV) stoves classified under HS Code.

The move comes after stakeholders from different sectors presented their views on the clauses during the public participation that took place for the better part of last month, highlighting the different impacts the bills would have on businesses and the economy at large.

In a report tabled by the National Assembly Departmental Committee on Finance and National Planning Chairman, Kimani Kuria, who is also the Molo Member of parliament, the clauses have been dropped in a bid to help businesses gro,w as the zero-rated status was passed into law in 2023 and are yet to show impact.

“The Committee noted that these supplies were only recently moved to zero-rated status under the Finance Act, 2023, as part of efforts to support local industries and reduce the cost of essential goods.

Therefore, reverting them to exempt status would undermine the objectives of that reform and introduce uncertainty into the tax framework,” Kuria said in the report.

According to him, such a change would increase production costs, costs that are likely to be passed on to consumers, ultimately discouraging investment and hindering economic growth.

“The Committee emphasised that retaining zero-rated status would uphold predictability and stability in the tax system, key elements in creating a favourable business environment,” he added.

Consistent tax policy enables businesses and investors to plan with confidence, make long-term commitments, and contribute effectively to the country’s economic development.

During the public participation period companies such as the East Africa Device Assembly Kenya Limited (EADAK), a local smartphone manufacturer, though Johnstone Kamunde, their Chief Financial Officer, had argue that the change in the tax policy would have adverse effects on the industry as it would increase the costs of local assembly and therefore increase the prices of phones.  

Local smart phones

“We are requesting that you also exempt the VAT on inputs for raw materials that can be supplied to a local manufacturer of local smartphones,” he said.  

When a product is VAT-exempt, the manufacturer does not charge VAT on its sale.

However, the manufacturer still pays VAT on the goods and services (inputs) used in the production process—such as raw materials, components, and utilities.  

Under exemption on the other hand, the manufacturer cannot reclaim or offset this input VAT against any output VAT, because no output VAT is being charged.  

On the other hand, on zero-rating, manufacturers charge 0 per cent VAT on their sales but can still claim input VAT on purchases, ensuring that VAT does not become a cost at any stage of production.