Ever since the court declared the Provisional Collection of Taxes and Duties Act unconstitutional and Kenya’s transition to the widely publicized budget making process, few legislative endeavours have captured the imagination of Kenyans as the Finance Acts. And rightly so, given that tax is the price we all pay to live in a civilized society.
The president assented to the Finance Act, 2025 on 27 June 2025 in line with the provisions of the Public Finance Management Act, 2012. This Act, which seeks to raise an additional KES 35 billion, has 66 sections. Of these, two will come into force on 1 January 2026 whilst the rest came into force on 1 July 2025.
Compared to the moribund Finance Bill, 2024, there is no doubt that the Finance Act, 2025, is less aggressive in terms of revenue mobilization. The Finance Bill, 2024, sought to raise an additional KES 344 billion in taxes. It is no wonder then that the majority of the Finance Act, 2025, changes are administrative and seek to optimize taxadministration and expand the tax base – an initiative commonly referred to as Tax Base Expansion, (TBE).
To properly understand the drive for TBE, the 2025 Economic Survey provides some vital insights. Kenya has a population of 53.3 million people with a mean age of 19 years. From a tax perspective, holding all else constant, this population’s purchasing power may also be limited leading to lower consumption taxes.
The survey also indicates that as of 2024, employees earning a wage were 3.4 million people whilst the informal sector accounted for 17.3 million people for a total employed population of 20.7 million.
From these statistics, it is easy to see the concern of employees, particularly those in formal employment, who contributed KES 561 billion or roughly a quarter of the Exchequer revenues in the year ended June 2025. It is probably why the government has implemented some of the Medium-Term RevenueStrategy proposals such as transitioning pensions from exempt-exempt-tax to exempt-exempt-exempt.In an attempt to level the playing field for pensions, the Finance Act, 2025, exempted gratuity payments from tax. A very noble initiative, especially for contract employees, particularly those in the agriculture and hospitality sectors who earn gratuity.
However, as they say, the devil is always in the detail. The gratuity exemption was housed under paragraph 53 of the First Schedule to the Income Tax Act, Chapter 470 of the Laws of Kenya (ITA). Paragraph 53 exempts “payment of pension benefits from pension and provident funds” on attainment of set criteria including membership of such pension funds for at least 20 years.Some practical questions that arise include do pensions or provident funds pay gratuity? Typically, it is an employer who pays gratuity at the end of a time bound contract of service. Secondly, and perhaps more critically, Section 5(2) of the ITA still lists gratuity payments as taxable income
It is important for policy makers to clarify and resolve this conflict so that the envisaged tax relief is accessible to taxpayers. To be sure, a separate line, say as paragraph 53B with corresponding amendments to Section 5 of the ITA would decisively resolve the conflict.
Another potential issue which is an oversight is that the requirement for the Cabinet Secretary to make Significant Economic Presence Tax (SEPT) Regulations under Section 12E (6) of the ITA within “six months from the commencement date of this provision”.
SEPT came into force on 27 December 2024. Therefore, the CS ought to have issued the Regulations on the day the Finance Act, 2025, was assented to – an impossible task given the need for public participation.Kenya has been at the forefront in terms of developing innovative taxes as evidenced by excise duty on a raft of supplies previously outside the scope of excise duty. Through the Finance Act,
