Understanding zero-rated vs exempt and their impact under proposed Finance Bill 2025
With the 2025 Finance Bill currently in the National Assembly, awaiting debate and voting before being presented to President William Ruto to be signed into law later, two confusing terms have emerged that have now become a point of focus for many people: zero-rated and VAT-exempt.
Many Kenyans have been left in a dilemma, depending on those with a deep understanding of economics and finance-related matters to break them down.
Yet, should the 2025 Finance Bill pass, it will have serious implications for the common mwananchi, who is the end consumer of most goods that are now proposed to be exempted from value-added tax (VAT).
Kiambu Senator Karungo wa Thang’wa recently took to his TikTok page to explain to Kenyans what the two terms mean and their implications for the Kenyan consumer should the Finance Bill 2025 be passed as it is.
He expressed disappointment that even some members of parliament, who are tasked with explaining the bill to their constituents and voting either in favour of or against it, do not understand the difference between the two.
“Si wewe tu; even some members of parliament are confused,” Thang’wa said.
If the Finance Bill 2025 passes with the current proposals, the prices of certain goods will effectively go up by 16 per cent.
The distinction
Zero-rated goods: When a particular commodity is zero-rated, it means the manufacturer or producer is not charged VAT.
Furthermore, any VAT incurred during the purchase of inputs or raw materials is refunded by the government. This prevents the producer from passing that cost to the consumer.
Example: If one operates a bakery and incurs VAT while purchasing flour, packaging, or other inputs, all that VAT is refunded, reducing operational costs and keeping prices low for consumers.
VAT-exempt goods: This is different. Any VAT incurred by the producer during production is not refunded.
As a result, the producer passes this cost on to the consumer, making the product more expensive.
Example: If a loaf of bread currently costs Ksh100, and the inputs used to produce it are exempt from VAT (rather than zero-rated), the producer will not get any refund on the VAT paid on inputs.
Consequently, the final retail price will go up by 16 per cent, costing the consumer Ksh116.
Under the 2025 Finance Bill, goods that were previously zero-rated are now proposed to be VAT-exempt, meaning producers will no longer receive VAT refunds.
This shift is expected to significantly increase the cost of living for consumers.
At first glance, one might think that VAT exemption is a benefit, but in practice, zero-rated goods are generally cheaper than VAT-exempt ones.
Mbadi explains the policy shift.
According to the Treasury Cabinet Secretary John Mbadi, this shift was proposed due to the misuse of the zero-rating provision by some producers.
Speaking at a town hall meeting in May 2025, the CS stated that many producers were taking advantage of consumers’ lack of knowledge and were not passing the benefits of zero rating to them, therefore enriching themselves instead of cushioning the consumer from high prices.
“The benefit of zero-rating a number of times is that business people don’t pass it to the ultimate consumer; you end up profiting people who are already doing well,” said Treasury CS John Mbadi.
He further explained that the ministry has been receiving many fictitious and fraudulent VAT refund claims.
Using an example from the bakery industry, he noted that many owners prefer hiring smart accountants over bakers not to produce more bread but to manipulate VAT refund claims for compensation from the Kenya Revenue Authority (KRA).
“We are receiving a lot of fictitious and fake claims from business people. They prefer employing more accountants than bakers because they really don’t need to bake bread. They just need to get smart accountants who can sit, cook figures, and take them to KRA to get paid,” Mbadi added.
Finance Bill 2025
The Finance Bill 2025, under Clause 36, proposes to amend the First Schedule of the VAT Act, 2013, to exempt specific supplies, including inputs for animal feed manufacture, transportation of sugarcane, and packaging materials for tea and coffee.
These were previously zero-rated, meaning suppliers could claim input VAT refunds. Now, as exempt supplies, input VAT cannot be reclaimed, potentially increasing costs.
Conversely, Clause 37 removes the zero-rated status for sugar transportation from farms to mills, shifting it to standard-rated (16 per cent VAT), which may raise costs for sugar producers.
Additionally, the bill introduces Section 66A to impose VAT on exempt or zero-rated goods used inconsistently with their intended purpose, targeting misuse in sectors like health and education.
