The Kenya Association of Manufacturers (KAM) has warned that the prices of medications could increase by up to Ksh90, due to the proposed changes in tax application in the Finance Bill 2025.
KAM cautioned that the proposed shift in VAT treatment of pharmaceutical inputs in the Finance Bill 2025 could raise medicine prices by at least 5 per cent starting on July 1.
While presenting its final submissions at the conclusion of the Finance Bill 2025 stakeholder hearings last Friday, the association opposed a proposal to change the VAT status of raw materials used in pharmaceutical manufacturing from zero-rated to exempt.
The suggested change in the Finance Bill 2025 would significantly affect the tax treatment of raw materials used in pharmaceutical manufacturing.
Under the current zero-rated regime, pharmaceutical firms benefit from charging 0 per cent VAT on their products while also being able to claim refunds on the VAT paid for inputs such as chemicals and packaging materials. This system helps reduce production costs and keeps medicine prices affordable for consumers.
However, switching to exempt status would mean that while manufacturers still would not charge VAT on the final product, they would no longer be eligible to claim input VAT refunds.
As a result, they would absorb the VAT costs on imported or locally sourced raw materials. This build-up of unrecoverable tax in the supply chain increases overall production expenses, a burden that is likely to be passed on to the end user in the form of higher retail prices.
According to the manufacturers, the proposed change will increase the cost of production for local medicine manufacturers, who will no longer be able to claim input VAT refunds, leading to higher consumer prices for essential medicines.
Further, the association highlighted that consumers will pay Ksh 90 more per unit of medicine under the exempt regime, resulting in a 5 per cent increase in the retail price.
Meanwhile, the Finance Bill 2025 proposes that VAT claims will be reduced from 24 months to 12 months. Currently, if a business pays more VAT than it owes, it has up to 24 months to claim the excess. This will aid the government in putting pressure on businesses to keep tight tax records and submit refund claims faster, or risk losing the excess amount.
Additionally, for businesses trading with either the government or other stakeholders, currently, if they do not get paid, as is the case with the pending bills, they get to claim VAT refunds within three years. However, in the proposed bill, the period will be shortened to two years.
This will allow businesses to use the unpaid tax to offset other VAT obligations. This will be a plus to those with VAT liabilities, but will pose a challenge for businesses operating on long credit terms.
