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In the debate around Kenya’s tax policy, two commonly used terms, zero-rated commodities and tax-exempt commodities, play a significant role in shaping the cost of living and government revenues.
While both aim to ease the tax burden on essential goods and services, their mechanics and implications differ widely.
Speaking during the Youth Parliament, where he engaged young people on the Finance Bill 2025, Treasury Cabinet Secretary John Mbadi offered insights that shed light on why the classification of a commodity as zero-rated or tax-exempt matters not just to businesses, but to every Kenyan.
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What Are Zero-Rated Commodities?
“Zero-rated commodities are taxed, but at 0%,” CS Mbadi explained.
Under Kenya’s VAT (Value Added Tax) system, this means that while suppliers don’t charge VAT on the final product (output tax), they are entitled to claim VAT paid on inputs—materials or services they purchased to produce the commodity.
“You are going to charge zero, but you claim any tax that you paid,” Mbadi said.
Common zero-rated goods include essential items like bread, milk, and other commodities.
This classification is designed to keep these goods affordable while still enabling manufacturers and suppliers to recover their VAT costs.
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What Are Tax-Exempt Commodities?
In contrast, tax-exempt commodities are not subject to VAT at all, and crucially, businesses cannot claim back any input tax they incurred during production or service delivery.
Examples include financial services, education, and healthcare sectors often exempted to reduce end-user costs, but where input VAT becomes a cost to the provider.
Practical Example: Bread
Consider a baker who buys flour, sugar, and electricity to bake bread. If bread is zero-rated, the baker can reclaim VAT paid on these inputs, keeping prices relatively low. But if bread is tax-exempt, they cannot claim input VAT.
Why Does Moving a Commodity from Zero-Rated to Exempt Matter?
Mbadi acknowledged that zero rating theoretically leads to cheaper goods. But he also raised two serious concerns:
Businesses don’t always pass savings to consumers.
The Treasury CS said that the government had determined that while many businesses claim VAT, they don’t pass the benefit to consumers, but instead use the claims to reduce their tax liability to KRA.
“So you end up profiting people who are already doing well, if I may use that word,” he noted.
Rampant tax fraud.
He also said that many businesses used VAT claims to defraud KRA by raising fictitious claims, due to limitations in the verification of the claims.
One example is the zero-rating of transport used to ferry sugar cane. It is hard to determine whether the fuel purchased by sugar manufacturers was used in ferrying cane or for other uses.
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When KRA issues billions in refunds for fictitious claims, the result is a limited budget for the development of the country.
“You pay that tax, and that tax, instead of being used to provide education to our children, to provide health services to you, to give you better roads and give you water to drink, that tax is used to refund someone who does not have to get that money,” he explained.
List of Goods proposed to be tax-exempt in the Finance Bill 2025
In the proposed Finance Bill 2025, the following goods have been reclassified from zero-rated to tax-exempt
1. Technology and Transport-Related Goods
Locally assembled and manufactured mobile phones
Electric Motorcycles & TukTuks
Electric bicycles
Electric buses
Solar and lithium-ion batteries
2. Energy-Saving and Green Appliances
Bioethanol vapour (BEV) stoves are classified under HS Code 7321.12.00 (used for cooking and warming plates with liquid fuel)
3. Pharmaceutical and Agricultural Inputs
Inputs/raw materials (local or imported) for pharmaceutical manufacturing, as approved by the Cabinet Secretary for Health
Inputs/raw materials for animal feed manufacturing, upon recommendation by the Cabinet Secretary for Agriculture
4. Agriculture Logistics
Transportation of sugarcane from farms to milling factories
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Zero-rated commodities offer a direct benefit to both producers and consumers when implemented honestly.
But as Treasury CS John Mbadi highlights, the abuse of VAT refunds and failure to pass savings to consumers has forced a policy rethink.
Meanwhile, tax-exempt goods don’t allow manufacturers to claim VAT refunds and reduce the risk of fraud and fictitious claims.