As engagements continue on the Finance Bill 2026, we are presented with a legislative opportunity to build the foundations of a globally competitive industrial sector capable of driving long-term economic growth and job creation. At a time when manufacturers are grappling with rising production costs, regional competition and shifting global supply chains, tax and policy measures should be designed to enhance competitiveness, attract investment, and encourage value addition.
Instead, some of the Finance Bill proposals could increase the cost of doing business and weaken the sector's ability to create jobs and expand exports. The Bill therefore presents not only an opportunity to identify these shortcomings, but also to advance practical reforms that can unlock manufacturing growth and position Kenya as a leading industrial hub.
One of the most persistent obstacles facing exporting manufacturers is the growing backlog of VAT refunds. As at February 2026, businesses were owed at least Ksh. 35 billion in outstanding VAT refunds, a situation that continues to strain cash flows and discourage both export growth and business expansion. Addressing this challenge calls for deliberate policy action, including amending the relevant laws to allow the Kenya Revenue Authority (KRA) to retain a designated portion of VAT collections specifically for refund payments. Equally important is adherence to fundamental VAT principles where which require that inputs and corresponding finished goods are VAT-exempt or zero-rated. For products subject to VAT, input VAT incurred can be recovered through input tax, lessening the tax burden. In addition, the government should prioritize the settlement of the existing refund backlog through a dedicated budgetary allocation and increase monthly refund disbursements to at least Ksh. 5 billion. This will ensure timely reimbursement of refund claims, improve business cash flows, and restore confidence among exporters and manufacturers.
Kenya is emerging as a leader in the assembly of mobile phones with six mobile phones assemblers already operating in the country. However, the proposal to re-classify several goods and production inputs from zero-rated to VAT-exempt poses significant challenges to manufacturers. Manufacturers cannot recover the VAT they pay on raw materials, packaging, transport, and other production costs when a product is VAT exempt. This proposal will increase production costs, thereby making locally manufactured goods more expensive. Where products attract the standard 16% VAT, manufacturers can claim back the VAT paid during production. The most effective system, however, is zero-rating as manufacturers can recover all input VAT, including costs related to packaging and overheads, lowering the cost of production.
Kenya has spent years building local pharmaceutical capacity and reducing dependence on imports. The proposed removal of zero-rating on pharmaceutical inputs would increase production costs for local manufacturers as it makes input VAT irrecoverable. The result is more expensive medicine and reduced competitiveness, in a sector that is quite critical for national health security. In the automotive sector, Kenya has positioned herself as a regional leader in electric mobility, with manufacturers investing heavily in local assembly plants and battery infrastructure. However, shifting these products from zero-rated to VAT exempt status would increase taxes on local assemblers while imported fully built units gain a pricing advantage.
The continued expansion of excise duty to additional products presents another challenge for Kenyan manufacturers. Excise duty was traditionally intended for luxury goods or products associated with social harm. Increasingly, however, it is being extended to production inputs and everyday manufactured goods. The proposal to impose excise duty on locally produced plastic articles, gummed paper, printed self-adhesive paper, and sugar confectionery places an additional burden on industries already grappling with high operating costs.
In addition, the imposition of excise duty on selected produced originating from the East African Community (EAC) such as kraft paper, articles of plastics, printing ink, imported float glass among others, undermines regional trade integration and the principles of the EAC Common Market. Such measures increase the cost of sourcing raw materials and finished goods from EAC Partner States, creates uncertainty for manufacturers relying on regional supply chains for inputs, and may expose Kenyan industries to retaliatory trade measures within the region.
The unpredictability of Kenya's tax policy environment is one of the biggest impediments to manufacturing sector growth. Frequent amendments to tax laws have created uncertainty for businesses and investors. Manufacturing investments are long-term commitments that require policy consistency and stability. Investors need confidence that tax incentives, input structures, and regulatory frameworks will remain predictable over time. Constant changes undermine strategic planning, complicate pricing decisions, and weaken investor confidence in Kenya's business environment.
Taxation on coal demonstrates the impact of policy inconsistency on manufacturers. Within a span of three years, government has introduced, repealed, and now seeks to reintroduce excise duty on coal. The Tax Laws (Amendment) Act, 2024 imposed a 2.5% excise duty on coal, which was subsequently scrapped under the Finance Act 2025. The Finance Bill, 2026 now proposes its re-introduction at an even higher rate of 5%. Coal is a critical industrial fuel used by Kenya's cement, steel, and ceramic industries. Despite having coal deposits, the country does not have active local coal mining, largely due to restrictive environmental regulations, forcing manufacturers to rely on imports.
The paper and packaging sector also demonstrates how cumulative taxation can reshape an entire industry. The tax burden on kraft paper has risen from below 50% to about 111%, made up of multiple layers including a 55% excise duty, 10% Export and Investment Promotion Levy, 25% import duty, 16% VAT, 2.5% Import Declaration Fee, and a 2% Railway Development Levy. The Finance Bill 2026 further proposes to extend the excise framework to kraft paper originating from East African Community countries, tightening the pressure on an already strained supply chain. Local capacity utilization has dropped, falling to about 33% for bags and balers and 55% for corrugated cartons, while imports of finished packaging materials have surged to 2,442 tonnes and 9,402 tonnes respectively. In the same period, three paper converting plants have closed, resulting in job losses. The impact on export competitiveness has been equally severe, with the cost of a 4 kg avocado export box increasing by 25%, from KSh 104 to KSh 130. A 17% increase in the cost of a flower box alone translates directly into a higher export price for Kenyan flowers, placing exporters at a disadvantage against lower-cost competitors such as Colombia and Ethiopia.
Whereas Government needs to mobilize revenue to finance development priorities, tax policy should strike a balance between short-term revenue collection and long-term economic growth. Policies that weaken manufacturing today ultimately reduce employment opportunities, shrink industrial capacity, and undermine future tax revenues. For Kenya to become a competitive manufacturing and export hub, policy must be designed to be an enabler of growth rather than a barrier to production.
The writer is the Chief Executive of Kenya Association of Manufacturers
Tobias Alando
June 9, 2026