Kenya’s 2025 Finance Bill: A Numbers-Driven Turning Point for the Tax Landscape

The Finance Bill 2025 marks a critical inflection point in Kenya’s economic governance, pivoting heavily toward revenue maximization. With the government targeting over KES 3.9 trillion in total revenues in FY2025/26, the proposals embedded in this bill reveal a clear strategy to tighten loopholes, increase enforcement, and expand the tax base, particularly via technical realignments and fiscal clarity.

Of the total projected revenue, KES 2.9 trillion is expected to be generated through ordinary revenue, primarily taxes. This means the Kenya Revenue Authority (KRA) is expected to collect KES 241 billion more than it did in FY2024/25. This significant uptick—over 9% growth year-on-year—places intense pressure on the KRA and raises questions about the sustainability of such growth amid shrinking disposable incomes.

One of the boldest numerical revisions in the Bill is the reduction in the VAT refund period from 24 months to 12. While the impact is procedural, the cash flow unlocked for businesses is estimated to exceed KES 120 billion annually, much-needed liquidity in a high-interest environment averaging 14.9% for commercial loans.

Equally noteworthy is the imposition of excise duty on high-strength alcohol—KES 500 per liter on spirits exceeding 90% alcoholic strength. If enforced, this could increase excise revenues by up to KES 4.8 billion annually, considering current import volumes and local production. However, it may also push low-income consumers further toward illicit brews.

The proposal to repeal the 100% and 150% investment deductions for Nairobi and Mombasa could result in tax liabilities rising for over 1,200 companies that previously enjoyed these reliefs. The anticipated clawback in foregone revenue is pegged at KES 21 billion over three years, but may come at the cost of job creation and real estate expansion in urban centers.

Further, the limitation of tax loss carry-forward to five years could immediately affect firms with accumulated losses worth over KES 180 billion across key sectors, particularly manufacturing and fintech. This could disincentivize investment in high-capex ventures, many of which only break even after seven years.

The redefinition of “royalty” under Section 2 expands tax obligations to include off-the-shelf software—a change that could generate an additional KES 2.2 billion annually, particularly from banks, telcos, and public institutions heavily reliant on foreign enterprise software.

A recent court ruling had removed such software from the royalty definition, but this Bill effectively overrides that interpretation. If passed, Kenya will collect a new withholding tax from thousands of digital transactions valued at over KES 40 billion annually.

On the international front, the move aligns Kenya closer to the OECD’s Base Erosion and Profit Shifting (BEPS) framework, especially Action 1 (digital economy taxation). The government expects to expand digital service tax collections by KES 5 billion annually under the adjusted definitions.

From an administrative perspective, the enhanced powers of the KRA Commissioner, specifically to access taxpayers’ third-party data, signal an era of aggressive enforcement. The Commissioner will now have the authority to integrate databases across 14 state agencies, tracking payments, IDs, bank records, and telecom footprints.

This capability, while a privacy concern for some, could raise compliance levels by at least 11%, translating into KES 80–100 billion in net new collections over two years. Still, data integrity and civil liberties must remain protected to prevent abuse.

On corporate instruments, the Bill removes redundant clauses in the definition of “debenture,” aligning with international terminology and simplifying finance documentation. This cleanup impacts over KES 300 billion in existing debenture instruments on the Nairobi Securities Exchange (NSE).

The Bill’s structure also reflects the government’s response to cash flow pressures. In Q4 2024, Treasury borrowed KES 96.7 billion from the domestic market in under one month—an unsustainable rhythm. These tax tweaks are, in essence, an attempt to reduce reliance on costly short-term borrowing.

For households, indirect tax changes may seem distant, but the ripple effects will be felt. Increased tax burdens on corporations could push consumer goods prices up by 3–6% over the next six months, especially for imported electronics, beverages, and software subscriptions.

In parallel, small business owners are likely to face tighter scrutiny. With over KES 800 billion worth of SME turnover escaping formal taxation annually, the KRA is betting big on digitized enforcement tools, including AI-assisted audits introduced in 2024.

Moreover, the government’s economic model under the Finance Bill assumes a GDP growth rate of 5.2% in FY2025/26, up from 4.8%. This projected expansion underpins its tax revenue expectations. But if the economy underperforms, tax collection targets will miss by a margin of up to KES 200 billion.

The real risk lies in the interplay between rising taxes and stagnant wages. The minimum wage was increased by 6% effective November 1, 2024, yet inflation for essentials like food, fuel, and housing is currently running at 8.3%, eroding any gains and tightening household budgets.

Youth unemployment remains a concern. Despite an increase in TVET enrolment by 15% year-on-year, the formal sector absorbed only 79,000 jobs in 2024. Without corresponding private sector expansion—possibly hampered by these tax proposals—job creation will lag population growth.

Financial institutions, including ourselves at ABSA, must prepare for increased demand for tax-efficient products. This may include capital preservation portfolios, REITs, and offshore options—especially if more Kenyans seek to protect earnings from creeping tax obligations.

As we counsel our clients, our emphasis will be on proactive tax planning, digital compliance, and structuring income in line with updated definitions. The 2025 Bill is not merely a legal document—it is a financial weather forecast. Prepare accordingly.

Therefore, the Finance Bill 2025 is as much about numbers as it is about behavior. It signals the end of leniency and the rise of enforcement. For those who adapt early—businesses and individuals alike—it offers clarity and planning opportunity. For those who don’t, the cost may be steep.

Read Also: Everything You Need To Know About The Finance Bill 2025: Priority On Revenue Collection Over The Welfare Of The Ordinary Kenyan