Esther Kithome,
Manager Mergers and Acquisition Tax & Regulatory services,
KPMG East Africa
Faced with rising public debt, persistent fiscal imbalances, and sluggish economic growth, Kenya’s 2025 Budget is a departure from previous years’ public finance strategies. Instead of introducing new or higher taxes a move that led to mass protests in previous year, the government has set its agenda towards tax compliance, efficiency, based on administrative reform and technology integration and incentive design.
In his address, the Cabinet Secretary of National Treasury and Economic Planning indicated that Kenya will cap its fiscal deficit at 4.5% in 2025/26, down from 5.1% in 2024/25 as part of a broader strategy to support public finances and service its debt. The country has a pressing necessity to fund its rising debt obligations both domestic and foreign at the same time maintain core public goods and development priorities. Fiscal consolidation seeks to lower debt-to-GDP ratio from 63% in 2024 to the 55% level by 2028 which is considered a sustainable threshold. Yet, raising taxes in a climate of high cost of living and unemployment risks political instability.
The climate change dilemma
The government’s 2025 budget plan is consistent with this balancing act: consolidating and not compressing, increasing revenue without increasing the burden on the public. The 2025 budget introduced a series of tax measures that will promote fiscal consolidation without adding more burdens to the taxpayers.
Instead of relying on increases in tax rates, the government is focusing on maximizing the existing taxes by focusing on improving efficiency, broadening the tax base, and stimulating economic activity.
Enhancing Tax Compliance and Administration
To seal existing loopholes and boost revenue collection, the Kenya Revenue Authority (KRA) is being strengthened by adopting innovative technologies such as the use of artificial intelligence, and administrative and policy reforms.
One of the big projects is the use of AI-powered audits, which are expected to identify and address fraudulent VAT refund claims more effectively. With this, the government also revised refund schedules and introduced harsher penalties for noncompliance, with clear enforcement communications. Moreover, the imposition of set deadlines for making tax refund decisions is designed to enhance greater predictability for corporations so that there can be a clearer tax environment. Overall, these measures will generate an extra KES 30 billion (approximately USD 233 million) in revenues, which points to the fact that substantial revenue gains can be achieved through improvements in efficiency rather than additional taxation.
Reforming Value Added Tax Structures
One of the significant structural reforms involves moving some of the earlier zero-rated goods and services to exempt VAT status. This move has been driven by the governments intention of reducing the VAT refund claims.
Some of the areas impacted by the shift include pharmaceuticals sector, e-mobility, animal feeds, locally assembled mobile phones and sugarcane transport services, among others. While zero-rating allows taxpayers to recover input for VAT, exempt status does not. This effectively will reduce refund liabilities and ease cash flow pressure on the Treasury.
Such change comes with trade- offs. Removing the possibility of businesses to claim input VAT incurred will increase the prices of these goods and services, considering the input VAT will be transferred to the final consumers. This would lead to inflation, particularly in sensitive a like health and energy.
Other VAT reforms include stand rating some of the previously exempt items in key sectors such as healthcare, energy and manufacturing. This move appears inconsistent with the Government’s declared commitment to supporting these key sectors.
Reframing Tax Reliefs as Economic Stimulus
In order to stimulate economic activity and maintain formalization important pillars for long-term revenue growth, the 2025 budget includes a range of targeted tax reliefs.
These include an expansion of the tax free per diem rate paid to private sector employees from a daily maximum of KES 2,000 to KES 10,000 per day, accelerated capital allowances on loose tools, utensils, linens and industrial tools and exemption from taxation on gratuity paid by both public and private employees.
In a bid to facilitate home ownership and align with the BETA Pillar on Affordable housing, the government has also extended the mortgage relief to individuals to include mortgages acquired for the construction of residential premises.
Although these reliefs/ incentives will reduce tax revenues moderately in the short term, they play a more significant economic role. By encouraging reinvestment, especially for small businesses, and supporting household consumption, these policies will expand the tax base over the longer run.
Addressing Taxation in the Digital Economy
As a result of the rapid expansion of Kenya’s digital economy and untapped revenue potential, the government is making certain moves to tax and formalize digital services.
In order to improve fairness and equality in excisable services taxation, non-resident individuals without physical presence in Kenya will now be liable to pay excise duty when they offer excisable services through the internet or electronic network. Besides discouraging double taxation of digital lending charges, institutions licensed under the Banking Act, the Co- operative Societies Act, and the Microfinance Act will be exempt from excise duty for digital lending.
The digital asset tax is no longer applicable on the transfer or exchange of digital assets. Instead, excise duty at the rate of 10% will be applicable on the fees charges by the owner of a platform for the transfer of the digital assets.
The reforms not only expand the tax base but also get Contact bring Kenya up to date with emerging global trends, on digital taxation.
With these reforms, the country may enhance its medium- term revenue prospects as well as offer a level playing ground for digital and traditional enterprises.
Risks and Limitations
Although the strategic goal of the 2025 tax reforms is evident, there are still some implementation challenges. The success of AI-driven audits and the enforcement of new refund timelines will depend on KRA’s operational capacity. Additionally, exempting zero-rated goods from VAT and standard rating some of the goods in key sectors may cause public disturbance if the rise in consumer prices is not adequately cushioned, especially in priority sectors like healthcare and renewable energy.
Finally, as much as these reforms can improve revenue collection in the short run, they should be accompanied by more fundamental structural change, especially in public expenditure and debt management in order to attain durable fiscal sustainability.
Conclusion
Overall, Kenya’s Budget 2025 is a thoughtful and calculated attempt at fiscal consolidation. Rather than increasing taxation, measures have been taken to streamline administrative efficiency, harness the digital economy, and spur economic growth through targeted reliefs. It is a rational and responsible response to the nation’s socio- economic situation.
But fiscal sustainability is not achievable simply through the tax policy alone. To ensure that Kenya achieves financial stability in the long run, these measures must be supplemented by more substantive changes in government spending, debt restructuring, and the wider public sector. As the country navigates this delicate high- wire act, upholding the confidence of the public will be extremely important.
(Author is a tax manager with KPMG Kenya. The views and opinion expressed are personal and may not be that of KPMG).