Budget Statement 2025/26 & The Finance Bill 2025

The Cabinet Secretary (CS) for Treasury John Mbadi is expected to present the Ksh4.23 trillion 2025/2026 Budget Statement before Parliament today on Thursday, June 12. Initially set at Ksh4.5 trillion, this 2025/26 Budget Statement is an increase from the previous year’s 2024/25 Ksh3.9 trillion budget. The 2025/26 Budget Statement will also include a brief on Kenya’s economic performance and outlook, revenue targets, sectoral allocations, deficit financing and tax proposals. Also, the CS is expected to table before Parliament the Budget Estimates Book, providing a line-by-line breakdown, the 2025 Finance Bill, the Appropriations Bill which authorizes spending of public funds, the Budget Policy Statement and the Medium-Term Debt Strategy.

This comes at a time when Kenya’s Finance Bill 2025 has taken a center stage and left many citizens asking: what does this mean for me? Tabled in Parliament on April 30, 2025, the Bill proposes wide-ranging tax and policy reforms to support the government’s ambitious KES 4.2 trillion budget for the 2025/2026 financial year. In a marked shift from the previous year’s approach—which sparked widespread protests over sharp tax hikes on essentials—this year’s Bill avoids new tax increases and instead focuses on closing loopholes, enhancing compliance, and broadening the tax net. Yet, even without direct tax hikes, the ripple effects will be felt by the average Kenyan—the mwananchi—through reduced take-home pay, digital economy oversight, and increased pressure on small businesses.

The government’s new revenue strategy is aligned with the Bottom-Up Economic Transformation Agenda (BETA), with a focus on sustainable, inclusive growth. Rather than increasing tax rates directly, the Finance Bill 2025 seeks to tighten tax administration, expand the taxable population, and leverage technology to improve compliance. This marks a clear pivot toward a more “enforcement-first” tax regime, particularly targeting the informal sector and digital economy [KPMG, 2025].

One of the most direct ways the bill affects citizens is through personal income taxation. While it introduces some relief measures—such as increasing the tax-exempt daily per diem from KES 2,000 to KES 10,000 and extending mortgage interest relief to self-constructed homes—it also proposes changes that could reduce net pay. A new clause mandates employers to withhold more PAYE upfront by applying all allowable reliefs, a move likely to lower net salaries [IEA Kenya, 2025]. This hits especially hard for salaried employees, many of whom are already grappling with high inflation and stagnant wages. On the positive side, gratuities and retirement benefits will now enjoy full tax exemption under the newly aligned Exempt-Exempt-Exempt (EEE) regime, providing some long-term financial relief [EY, 2025].

With digital entrepreneurship and gig work becoming more common, the Bill proposes to reduce the Digital Asset Tax from 3% to 1.5%—a welcome change for online traders and crypto users. However, the tax still applies to every transaction, regardless of profitability, and the Kenya Revenue Authority (KRA) is expanding its capacity to monitor digital transactions, raising concerns about surveillance and privacy [Roedl & Partner, 2025].

The Bill also expands the definition of royalties to include software licensing, thereby taxing entities involved in digital services and content distribution. This could increase costs for businesses that rely on tech tools—and these costs may trickle down to consumers through price hikes [PKF EA, 2025].

Perhaps the most impactful shift for small and medium enterprises (SMEs) is the mandatory use of electronic Tax Invoice Management System (e-TIMS) starting July 1, 2025. While this move aims to increase tax transparency and curb fraud, it also burdens SMEs with new administrative requirements, especially those without digital infrastructure.

Additionally, the Finance Bill shortens the timeline for claiming input VAT refunds to 12 months, a decision that might restrict working capital for many businesses. However, essential goods such as animal feed and diagnostic kits remain VAT exempt, helping to stabilize prices for some staple products [TV47, 2025].

Corporations will also feel the effects of the Bill, which limits the carry-forward of business losses to five years, down from indefinite periods. This is likely to discourage long-term investment by businesses expecting delayed profitability, such as startups or companies in capital-intensive sectors. Furthermore, the Bill scraps the 15% tax relief previously available to developers constructing over 100 affordable housing units annually, potentially slowing down the rollout of government-backed affordable housing projects [PKF EA, 2025]. These changes could indirectly hurt citizens through reduced job creation and higher rental prices, especially in urban areas.

To align with global tax practices, the Bill introduces Advance Pricing Agreements (APAs) and country-by-country (CbC) reporting requirements for multinationals. These measures are intended to curb base erosion and profit shifting by ensuring that multinationals pay fair taxes in Kenya. While these are long-term regulatory changes, they could influence multinational investment decisions in Kenya—either positively, by offering transparency, or negatively, if compliance becomes too costly [EY, 2025].

In an attempt to attract foreign and local investment, the Bill retains favorable tax incentives for companies operating in Special Economic Zones (SEZs) and the Nairobi International Financial Centre (NIFC). Such incentives aim to spur job creation, attract capital, and stimulate exports. Moreover, the Voluntary Tax Disclosure Program (tax amnesty) is still available until June 30, 2025, offering businesses a chance to settle past tax liabilities without penalties [Roedl & Partner, 2025]. For the average citizen, these moves might lead to indirect benefits like employment opportunities—if investments materialize.

One of the more contentious parts of the Bill is the expansion of KRA’s administrative powers. The Commissioner can now access digital taxpayer data with broader discretion, raising privacy and surveillance concerns. Though the Bill introduces a new clause allowing for penalty waivers in system-generated tax errors, many see this as a double-edged sword that increases the government’s oversight while offering limited taxpayer protection [PKF EA, 2025]. While dispute resolution has been improved, for instance by requiring electronic notifications and extending exemption application processing times to 90 days, compliance complexity remains a burden, especially for small traders and individuals unfamiliar with the tax system.

A key driver behind the 2025 Finance Bill’s aggressive revenue collection strategy is Kenya’s ballooning public debt. Kenya’s domestic revenue for the 2023/2024 fiscal year stood at KES 2.49 trillion—well short of the government’s expenditure needs. With over KES 1.1 trillion allocated to debt servicing in the proposed 2025/2026 budget, the government faces a fiscal squeeze that leaves little room for development spending. This debt burden forces the Treasury to raise funds both domestically and internationally, leading to greater pressure on taxpayers to bridge the gap. Consequently, the mwananchi bears the brunt through tightened tax compliance, shrinking net salaries, and reduced social spending—raising questions about fiscal sustainability and the long-term socioeconomic impact on ordinary Kenyans. [People Daily, 2025]

You may ask, Who Bears the Burden? The Finance Bill 2025 is carefully crafted to avoid the backlash seen in 2023 and 2024 following sharp fuel and consumption tax hikes. On the surface, it promises fairness and growth. Yet, its effects on the mwananchi are layered. While some will benefit from reliefs and long-term investment in SEZs, others—particularly the salaried middle class, digital freelancers, and informal traders—face a future of reduced take-home pay, tighter scrutiny, and higher compliance costs. Whether this trade-off is worth it depends on how effectively the government translates increased revenue into tangible public services, job creation, and economic equity.

References:

Budget Statement 2025/26 & The Finance Bill 2025

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