The Cabinet Secretary for Finance and Economic Planning is set to present the budget for the Financial Year 2025/26 to Parliament for approval on June 12, 2025.  

In the proposed budget, the government plans to spend approximately Ksh4.239 trillion in the upcoming financial year, beginning from July 1, 2025, to June 30, 2026.

The budget is expected to be financed by ordinary revenue, which is projected to be Ksh2.75 trillion, appropriations-in-Aid of approximately 0.56 trillion, net external financing of Ksh284.2 billion and net domestic financing of Ksh591.9 billion.

The budget deficit currently stands at Ksh876.1 billion.   

As part of the strategies to raise the Ksh2.75 trillion ordinary revenue that is required to fund the fiscal expenditure, the National Treasury published the Finance Bill, 2025, with an aim of intensifying domestic revenue mobilisation through expansion of the tax base, reduction of tax expenditure and increased administrative reforms.   

While the Finance Bill, 2025, does not contain new taxes, there are several proposals to remove tax incentives granted to certain businesses and commodities in line with the move to trim down on the tax expenditure associated with the incentives.  

Notable proposals relating to business taxes in the Finance Bill, 2025 include the provision for the allowability of expenses incurred for constructing public sports facilities to promote the sports sector and the limitation of tax losses carried forward for businesses to five years to ensure that all companies pay taxes on profits after a certain period of time.

They also include increasing the timeframe for processing income tax exemptions from 60 days to 90 days to allow for more time for the commissioner to scrutinise exemption applications and removal of accelerated investment allowances for hotel and manufacturing businesses, where the affected organisations will be granted standard capital allowances and removal of the preferential tax rates for companies constructing residential units or assembling motor vehicles, further aligning with the drive for rationalisation of tax expenditure.  

Further, the Bill proposes to reduce the digital asset tax rate from 3 per cent to 1.5 per cent of the transfer or exchange value of the digital asset.

The trading of digital assets such as token codes, cryptocurrency and non-fungible tokens is becoming increasingly popular in the global economic environment.  

On personal taxes, the Bill proposes to increase the tax-free per-diem amount granted to employees from Ksh2,000 to Ksh10,000 per day, thus increasing the spending limit, allowing for the tax deductibility of interest incurred on mortgages for constructing residential properties and exempt gratuities received from pension schemes from tax.  

On tax administration, taxpayers who fail to remit withholding tax will be exempt from paying the principal tax if the recipient has fully accounted for the same.  

Additionally, the timeline for processing tax refund applications will be extended from 90 days to 120 days, with tax audit periods extending from 120 days to 180 days in response to the growing debt relating to tax refunds and tax refund fraud witnessed in the recent past.  

Notably, the Bill proposes to grant the Commissioner unrestricted authority to access personal and other private data to aid tax compliance monitoring, a move that many taxpayers have condemned on account of potential violation of data privacy rights.   

The proposals for indirect taxes sparked the most debate from taxpayers. The proposed amendments include the requirement for all registered persons to issue valid tax invoices.  

The requirement to issue valid tax invoices for all supplies, unless specifically exempted, was introduced in the Finance Act, 2013, under the Tax Procedures Act, 2015, and the proposed amendment aims to align the VAT Act, 2013, with this requirement.  

Interestingly, the VAT status for certain goods will change from exempt to taxable, resulting in additional costs of final goods for consumers in respect of the added VAT.  

Such goods include aircraft parts, fuels, tourism facilities, hospital equipment, goods purchased for the construction of houses under the affordable housing scheme, equipment used for the generation of solar and wind energy and other goods.

In the same vein, the VAT status of certain goods and services will change from zero-rated to exempt, to mean that input VAT incurred to produce these supplies will not be claimable, resulting in the VAT cost being added directly, thereby raising the prices.  

Supplies in this category include raw materials used in the manufacture of medicaments, transportation of sugarcane to milling factories, locally assembled mobile phones, motorcycles, solar batteries, electric bicycles, certain buses and raw materials used for the manufacture of animal feeds.  

The prices for packaged tea and coffee, coal, imported glass, certain paper and alcohol are also expected to increase on account of VAT and excise duty if the Bill is passed as is.  

While Finance Bill, 2025 is not as harsh as Finance Bill, 2024, some experts and taxpayers have cautioned that the removal of tax incentives for certain businesses and reclassification of the VAT status of the commodities and supplies mentioned will result in increased prices for consumers, putting further financial strain on the public amidst the current tough economic times.  

Public engagement forums set to discuss the proposals in the Finance Bill, 2025, were concluded on May 30, 2025, and we can only hope that the sentiments of the taxpayers in regard to these changes will be considered before the Bill is passed into an Act.  

The writer is a Tax Manager and Business Advisor at EY.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the official stance of EY.