The Finance Bill 2025

The Finance Bill 2025 has been approved by the National Assembly, with the contentious data access clause granting KRA unrestricted access to taxpayers’ financial data removed due to privacy and constitutional concerns. The Bill now awaits presidential assent. Once assented to, the Bill will come int

Key Highlights and Implications

• Increase in the tax free per diem ceiling from KES 2,000 to KES 10,000

This offers significant relief to employees who bear extra expenses while traveling for official duties and is a positive and commendable proposal.

• Reduced tax rate on digital assets from 3% to 1.5%

This will lower transaction costs for digital assets such as cryptocurrency promoting their exchange and adoption.

• Expanded definition of Royalty to include distribution of software

The definition of royalty has been expanded to include software distribution where regular payments are made for its use through a distributor. This is in response to the High Court’s ruling in Seven Seas Technologies Limited v Commissioner for Domestic Taxes (2024) which held that payments for the distribution of computer software did not attract withholding tax as they did not constitute royalties.

• Reduction in the period for Carrying Forward Tax Losses from an indefinite period to a maximum of five years

Limiting tax loss carry-forward to five years may increase the tax burden on startups and capital-intensive sectors with long profitability cycles. While it could boost short-term revenue, it risks discouraging long-term investment.

• Removal of annual turnover exemption in respect to Significant Economic Presence Tax

The Bill proposes removal of the exemption of non-residents with an annual turnover of less than KES 5million from paying Significant Economic Presence Tax. This will expand the tax base and increase revenue.

• Reduction in the period for VAT refund claims from 24months to 12 months

This proposed amendment aligns with the VAT claim timeframe under the Tax Procedures Act.

• Amendment of VAT status of the following from exempt to taxable at the rate of 16% goods imported or purchased locally for the direct and exclusive use in the construction of houses under the affordable housing scheme, taxable goods imported for the exclusive use in geothermal, oil or mining prospecting by a person validly granted an exploration licence under the Energy Act and specialized equipment for the development and generation of solar and wind energy.