Companies producing bread, maize flour, and milk could soon stop receiving tax refunds from the National Government, following a new proposal by the Treasury to shift these goods from the VAT zero-rated list to the exempt category.

Currently, firms enjoying zero-rating can claim refunds on costs related to power, raw materials, and other inputs. However, those under the exempt list pass these additional costs on to consumers.

The Treasury Cabinet Secretary argues that the refund policy has been misused, with firms failing to pass the benefits on to consumers, prompting the need for a policy overhaul.

The plan is expected to negatively impact Kenyans already facing tough economic times, as corporations will be forced to pass on the extra costs to consumers.

The proposal follows the Treasury’s earlier, unsuccessful attempt to impose a 16 percent VAT on bread and milk under the 2024 Finance Bill, which faced significant public opposition.

The government claims that zero-rating has led to substantial revenue losses, amounting to billions of shillings, at a time when it is trying to expand the tax base and cover a budget deficit of over Sh300 billion, partly caused by changes to the Finance Bill.

In 2022 alone, the Kenya Revenue Authority (KRA) forgone Sh119.9 billion in tax refunds, up from Sh98.4 billion in 2021.