The Kenya Revenue Authority (KRA) has recommended a further review of tax exemptions on goods and services as it identifies a Sh1.78 trillion gap in collections of value-added tax(VAT).
An internal report from the tax authority reveals that the difference between actual and potential tax collections from VAT amounts to 11.8 percent of gross domestic product (GDP) as of the end of 2023, which translates to a nominal Sh1.78 trillion.
The report states that the current policy regime is the largest contributor to the VAT gap, at 6.8 percentage points, while the deficit from non-compliance is assessed at a lower 4.9 percentage points, or approximately Sh740 billion.
The recommendation to review VAT exemptions implies that the taxman could be seeking a reduction in the number of goods and services enjoying exemptions.
Ending exemptions on crucial commodities such as food staples, including bread and maize flour, has nevertheless proved difficult in the face of recent deadly anti-tax protests.
“Policy gaps remain higher than the compliance gap and significant at 6.8 percent of GDP in 2023,” KRA states in its report dated July 2025.
“There is a need for further deep dive analysis of the policy gap and review of tax expenditures.”
Basic foodstuffs, including maize flour and bread, healthcare and medical supplies, educational services, and agricultural and livestock inputs have remained largely outside the scope of VAT.
The category of goods and services, which also includes exports, has either been exempt from the 16 percent standard VAT rate or zero-rated, where suppliers of the items have been able to claim refunds for VAT paid on inputs.
The National Treasury has turned its attention to these exemptions as the scope to raise new taxes narrows.
Under the 2025 Finance Act, VAT exemptions for items including digital media storage devices, goods for exclusive use in geothermal and oil prospecting, and imported raw materials for textile manufacturing were ended.
Exemptions were, however, granted for items including mosquito repellent and locally consumed teas, while tea and coffee packaging materials were zero-rated for VAT.
The Treasury previously made the case for winding up zero-rating for key supplies such as maize flour, but softened its stance following the deadly anti-tax street protests in June 2024.
“I know many people say that zero-rated is cheaper than exempt, and I agree, but the benefit is never passed to the consumer. The worst part is when you allow those zero-rated commodities, these guys will come and claim money that they shouldn’t even claim,” Cabinet Secretary John Mbadi said in October last year.
“You will hear some say that you should not even employ bakers but rather employ accountants to cook your books and go to KRA to get their money.”
VAT is the second largest tax head after income taxes and netted Sh660.7 billion for the exchequer in the year to June 2025 from Sh645.4 billion previously.
The tax head was also the only revenue line to hit the target for the 2024/25 fiscal year, where total tax receipts stood at Sh2.42 trillion.
VAT was first introduced in January 1990, replacing a sales tax system, and is charged on the consumption of taxable goods and services supplied or imported into the country.
The VAT threshold is set at Sh5 million in annual turnover.
KRA has also identified other drivers behind the VAT gap, including a weaker economic environment.
“There has been disruption of business activities, change in business models, job losses, and transition to informal activities and growth of sectors where informality is prevalent in the post-Covid period,” KRA added.
