Photo/courtesy.
Kenya’s tourism and manufacturing sectors risk significant financial setbacks if the government moves forward with proposals to eliminate Value Added Tax (VAT) exemptions in the Finance Bill 2025, global tax advisory firm Ernst & Young (EY) has warned.
The firm cautions that the proposed changes, which would subject previously VAT-exempt goods and services to the standard 16 percent VAT rate, could stifle sector growth, drive up consumer prices, and derail the country’s broader economic development goals.
Among the items targeted for VAT inclusion are goods used directly in constructing tourism facilities, specially designed vehicles for transporting tourists, and inputs for locally assembling passenger vehicles.
While the government argues that the proposed amendments aim to expand the tax base and enhance compliance, EY and other experts warn of adverse ripple effects on industries that are key to job creation, foreign exchange earnings, and infrastructure development.
“The removal of exemptions for the tourism and manufacturing sectors is likely to negatively impact these industries and reduce revenue generation in the long term,” said Stephen Ndegwa, EY Associate Director.
“Although the government may realize short-term gains, the policy shift could discourage investment and lead to contraction in these critical sectors,” he added.
ALSO READ: Construction Sector Hit by Inflation and Credit Crunch
The tourism industry, still recovering from the disruptions of the COVID-19 pandemic and other economic shocks, could be particularly vulnerable.
Tour operators will now be required to pay VAT on specialized vehicles that were previously exempt.
In addition, the cost of constructing key tourism infrastructure such as convention centers, recreational parks, and large-scale tourism facilities could rise significantly.
These projects are vital components of Kenya’s Vision 2030 and the Bottom-Up Economic Transformation Agenda (BETA).
Manufacturers also face headwinds, as the standard VAT rating would apply to raw materials and components used in assembling vehicles locally. This could raise production costs, push up retail prices, and undermine efforts to promote local manufacturing under the “Buy Kenya, Build Kenya” initiative.
As Parliament begins debating the Finance Bill, stakeholders in tourism and manufacturing are urging policymakers to reconsider the proposed changes and explore alternative revenue measures that do not compromise economic recovery and growth.
