Kenya Revokes VAT on Exports to Boost Global Competitiveness

Treasury CS Njuguna Ndung'u speaks during the Council of Finance & Economic Affairs & Pre-Budget Consultation in Arusha.
Treasury CS Njuguna Ndung'u speaks during the Council of Finance & Economic Affairs & Pre-Budget Consultation in Arusha.
National Treasury

In a sweeping tax policy shift announced on Thursday, May 30, President William Ruto’s administration has reversed its decision to impose VAT on goods and services for export, a move set to enhance the competitiveness of Kenyan products in the global market.

However, the government has concurrently tightened its grip on domestic VAT regulations, mandating that all goods and services, whether imported or produced locally, be subject to VAT.

The National Tax Policy stipulates that “all goods or taxable services shall be charged VAT whether they are imported or produced locally,” aiming to create a uniform tax regime.

This change means that all goods, from maize harvested on local farms to maize flour on supermarket shelves, will be subject to VAT.

The policy explicitly states, “No exemption or lower-than-standard rate of VAT shall be provided to any person on distributional consideration,” adding that all goods or taxable services for export will be taxed at a rate of zero to promote competitiveness in international markets in accordance with the destination principle.

Kenya Revenue Authority building at Times Towers
Kenya Revenue Authority building at Times Towers

The National Treasury elaborated, “VAT shall be charged at all stages of production and distribution, including at the retail stage.” This significant policy shift removes the contentious VAT on export services, which had been imposed in the Finance Bill 2022, making the export of services subject to VAT at the standard rate of 16 percent effective from 1 July 2022.

The raft of tax changes comes as the Ruto administration responds to a decade-long insistence from the International Monetary Fund (IMF) to drop blanket reliefs on consumption. These changes are expected to increase the cost of essential goods and services, should the proposed review of taxation laws be fully implemented.

For roughly a decade, the IMF has advocated for the government to tax all goods while also providing social assistance programs to cushion the effects on vulnerable households.

The Value Added Tax treatment on exported services from Kenya has long been a contentious issue, sparking numerous disputes between the Kenya Revenue Authority (KRA) and taxpayers engaged in cross-border business.

The government’s announcement of significant changes to its tax policy is part of a broader strategy to expand the tax base and increase revenue. The National Tax Policy specifies that all income generated within Kenya will now be subject to corporate tax, regardless of the source.

This move aims to reverse the trend of declining tax revenues. The policy outlines that the tax base for corporate income tax will encompass all revenues sourced in Kenya on an accrual basis, irrespective of whether they are derived from business activities or other sources.

These new measures respond to the erosion of Kenya’s tax revenues, attributed to numerous incentives and exemptions granted to the ultra-wealthy and large investors over the past decade. While these incentives were initially introduced to attract investment, they have resulted in a diminishing tax-to-GDP ratio.

Critics argue that the broad application of VAT will disproportionately impact low-income households, exacerbating the cost of living.

However, proponents believe that a more consistent and comprehensive tax regime will lead to a more equitable distribution of tax burdens and ultimately strengthen the country’s fiscal position. 

Njuguna Ndugu
Treasury CS Prof. Njuguna Ndugu During the signing of Aid Credit Facility Agreements between the Governments of Kenya and Hungary, March 27.