Tax Alert, Finance Act 2025

Tax Alert

Background

The Government of Kenya publishes a Finance Act every year to amend various Kenya’s tax legislations. And on that effect, on 26 June 2025, the President assented into law the Finance Bill, 2025 to make it an Act.

This year’s Finance Act aims to stimulate sustainable economic recovery for improved livelihoods, job creation and Business and Industrial Prosperity in line with the Bottom-Up Economic Transformation Agenda. This theme was premised on the prevailing economic conditions.

The amendments in the Finance Act 2025 (“FA”) came into effect on 01 July 2025 with the exception of only two amendments that will come into effect on 1 January 2026, that is, the introduction of advance pricing agreements and the amendment regarding the use of the import declaration fee (IDF) collected by the Government whereby the Government intends to use 10% of the total IDF fee collected towards measures intended to enhance revenue collection.

Economic outlook

The Kenyan economy has remained strong where it has consistently registered an average growth of 5.1 percent per year for the period 2022 to 2024. This growth is well above the world average growth of 3.4 percent and 3.8 percent for the sub-Saharan African region, over the same period.

Macroeconomic indicators have strongly taken a hop and continue to strengthen. The inflation rate has declined to 3.8 percent in May 2025 from a peak of 9.6 percent in October 2022. The Kenya Shilling exchange rate has now stabilized against major international currencies and interest rates have gradually come down in line with the easing of the monetary policy.

In view of the above, the economy is projected to improve and expand by 5.3 percent in 2025 and 2026 driven by enhanced agricultural productivity, a resilient services sector, and the ongoing implementation of policy measures in the priority sectors of the Government’s Bottom-Up Economic Transformation Agenda (BETA).

Proposed tax changes

Further, the FA proposals point to the tax measures the Government wishes to enforce as law. The FA amends the Income Tax Act (ITA), Value Added Tax Act 2013 (VAT), Tax Procedures Act (TPA), Excise Duty Act (EDA) Customs Duty Act (CDA) and other miscellaneous legislations. In this alert, we analyze the contents of the FA in line with the budget statement, the effective dates of the proposed changes and their potential implications.

Significant tax changes:

1. Income Tax changes

• Employee allowances

The FA increases the allowable tax-free limit on employee allowances, specifically those related to subsistence, travel, and entertainment. The previous daily exemption limit of Kenya Shillings Two Thousand (KES 2,000) has now been increased to Kenya Shillings Ten Thousand (KES 10,000).

Implications

This amendment intends to reflect on the rising cost of living and operational expenses, and to provide fairer compensation for employees incurring costs while working away from their normal place of duty.

Effective Date: 01^st July 2025

• Deletion of Minimum Tax

The FA has deleted the provision that previously required the taxpayers to pay a baseline tax amount where the instalment tax liability is lower, even if they report minimal or no profits. The objective of this provision was to ensure all businesses contribute a fair share of tax, particularly targeting firms that declare losses to avoid tax liability.

Implications.

This deletion aligns the tax laws with constitutional and judicial standards, and restores a system where tax is levied based on actual profits or income, rather than gross turnover. The minimum tax was considered punitive particularly to loss-making or early-stage businesses, as it imposed a tax liability regardless of profitability and it undermined the