In recent times, Kenya has made significant progress towards achieving Universal Health Coverage (UHC) by ensuring that health care services are equitably distributed at all levels of our health facilities.  These milestones are a step in the right direction and can only be realised through sufficient financing, favourable tax incentives and a zero-tolerance to corruption.

However, it is important to note that the health situation in Kenya is further complicated by structural and systemic challenges, including inadequate financing, poor infrastructure and inadequate medical personnel. Currently hospital buildings and equipment enjoy investment allowance at rate of 50 per cent in the first year of use and balance in the succeeding year.

However, to encourage investment and boost health services in county level, it will be imperative for policy makers to introduce tax incentives to the hospitals investors in terms of investment allowance at rate of 150 per cent for any investor who incur capital expenditure in construction of hospital with at least 50 bed capacity and two fully equipped medical laboratories and theatres outside Nairobi and Mombasa county.

The aforementioned challenges are made more grim by the trend that we have recently noticed from tax policymakers, where, since the enactment of the VAT Act, 2013, there has been a move to subject Value-Added Tax (VAT) on certain medicaments and products at a rate of 16 per cent, leading to increased costs of operation for hospitals and subsequently, passed to the final consumer/patients, and making the health services unaffordable.

This circumstance raises grave questions regarding the population’s access to necessary medical care. Many patients might therefore choose not to receive necessary treatments, worsening the already-existing disparities in the healthcare system.

The Finance Bill, 2025, proposes to tax goods at a rate of 16 per cent for the direct and exclusive use in the construction and equipping of specialised hospitals with a minimum bed capacity of 50.

This move of reclassification from VAT exempt to taxable at 16 per cent will ultimately increase the cost of medical care, which is against the government’s Universal Healthcare Pillar of improving healthcare access. Currently, the country needs more specialised hospitals to take care of patients with various diseases and are forced to travel abroad at huge costs for specialised treatment.

This will also have a negative impact on both investors in the healthcare sector and increasing the cost of medical care. Preferential taxation gives some people, companies, or sectors lower tax rates or more advantageous tax conditions than others. This is because the tax incentive is the right path for Kenya’s health sector.

This taxation concept typically relieves a sector of the economy that is already heavily taxed by direct and indirect taxes or stimulates growth in a sector that needs a boost.

Different sectors in Kenya, other than the health sector, have been granted preferential corporate tax rates.

For instance, in the case of a special economic zone enterprise, whether the enterprise sells its products to markets within or outside Kenya, developer and operator receive 10 per cent for the first years from the date of first operation and thereafter 15 per cent for another ten years and 10 per cent for companies undertaking the manufacture of human vaccines. In the case of a company whose business is local assembling of motor vehicles, 15 per cent for the first five years from the year of commencement of its operations.

Having evaluated the above preferential corporation rate, it will be prudent to grant the health sector a preferential rate of 10 per cent and grant VAT exemption to goods and services supplied to hospitals.

This will attract more investors both locally and internationally and will subsequently create employment and more so, boost our economic growth and improve health services to all.

Through government policy in a tax perspective, it will require the hospitals to lower the charges to all people seeking medical help and hospital should at least have fifty-bed capacity and two fully equipped medical laboratories and theatres, and this will be key to qualifying for a preferential corporation tax rate.  As stipulated under section 16 of the Income Tax Act of Kenyan laws, gross interest paid or payable to related persons and third parties who are non-residents in excess of 30 per cent of earnings before interest, taxes, depreciation, and amortisation of the borrower in any financial year is not allowed for tax purposes.

Under this concept of interest restriction, the company will not be allowed to claim a tax deduction for interest. However, this restriction does not apply to financial institutions, microfinance institutions, or non-deposit-taking lenders, despite their often high interest rates.

To attract foreign investment and boost reinvestment in the health sector, policymakers should exempt health-related entities from this interest restriction. This would lower borrowing costs, increase investment inflows, and improve healthcare services.

Additionally, offering a preferential corporate tax rate, VAT exemption supplies and removing interest restrictions for the health sector would raise retained earnings.

These funds could support expansion, such as building hospitals and hiring qualified staff—key steps toward achieving Universal Health Coverage (UHC) in Kenya.

The writer is Associate Tax director at PKF East Africa.