Kenyan Businesses Exploit Tax Reliefs at the Expense of Households

Despite government efforts to alleviate the financial burden on consumers through various tax reliefs and financial incentives, businesses in key sectors across Kenya are largely absorbing these benefits, resulting in persistent price rigidity. 

This situation is causing increasing frustration among policymakers, who are now considering more stringent measures, including potential price controls, to ensure affordability for the public. Kenya’s market economy, driven by the profit motives of shareholders and strategies focused on cost minimisation, has led businesses to prioritise financial gains over providing relief to consumers. The failure of these incentives to translate into lower retail prices has reignited debates over whether state interventions should be reevaluated or even withdrawn entirely.

One of the most striking examples of this issue is in the energy sector, specifically the cooking gas industry. The government, in an attempt to make cleaner energy more accessible, removed the standard 16 percent value-added tax (VAT) on cooking gas through the Finance Act 2023. This policy was intended to drive down consumer prices and encourage a shift away from traditional fuel sources such as charcoal and firewood.

However, instead of leading to a significant price decrease, multinational oil marketing firms have absorbed the tax relief while maintaining high profit margins. The cost of refilling a 13-kilogram cylinder remains significantly higher than it was before the VAT removal, forcing consumers to bear the brunt of unchanged pricing. Data indicates that these companies incur approximately Sh1,261 to refill such a cylinder but sell it for upwards of Sh3,200, securing profit margins as high as 156 percent. 

This lack of regulatory oversight has left consumers with no recourse, while businesses continue to enjoy financial benefits that were originally intended for public relief. A similar trend has been observed in Kenya’s banking sector, where financial institutions have benefited from cheap deposits and low-cost loans from the Central Bank of Kenya (CBK). Despite these advantages, nearly 14 banks have reportedly refused to adjust lending rates in favour of borrowers, arguing that they are burdened by high-cost deposits that prevent immediate rate reductions.

However, official CBK data presents a different picture, showing widening spreads—the difference between interest rates paid to depositors and those charged to borrowers. This indicates that banks have maintained high lending rates while continuing to enjoy significant profit margins. The CBK has responded to this reluctance with stern warnings, threatening banks with penalties for failing to comply with policy rate reductions. Among the proposed fines are charges of up to Sh20 million or three times the monetary gain from maintaining high lending rates. 

Additional daily penalties would also apply to non-compliant loan accounts.

The impact of these high borrowing costs has been particularly severe for small and medium-sized enterprises (SMEs), which have faced increased loan application rejections. Private sector credit growth recently hit a 22-year low, exacerbating economic stagnation and reducing business expansion opportunities. Economist Ken Gichinga has argued that comprehensive reforms in the banking sector are necessary to promote competition and ensure that financial institutions act as enablers of economic growth rather than barriers.

The telecommunications sector has also exhibited reluctance in adjusting prices despite receiving tax reductions. The Finance Act 2023 reduced excise duty on internet data from 20 to 15 percent—a policy shift meant to ease costs for consumers and stimulate digital access. However, major service providers such as Safaricom and Wananchi Group continued charging similar rates. Competitive pressure only forced improvements in service quality after the arrival of Elon Musk’s Starlink, which introduced higher-speed internet options. Notably, when excise duty was increased in the Finance Act 2021 from 15 to 20 percent, providers swiftly adjusted their prices upwards, citing tax burdens. 

However, when the rate reverted back to 15 percent in 2023, no such price reductions followed, highlighting an asymmetry in how businesses respond to taxation. In the agricultural sector, the Finance Act 2021 zero-rated VAT on the transportation of sugar cane from farms to factories, with the goal of reducing production costs for farmers. Despite this measure, sugar cane growers have reported no noticeable decline in transport costs, as millers continued charging high rates. 

In response, the government has proposed shifting the classification of sugar cane transportation from zero-rated to VAT-exempt. The difference lies in tax reclaimability—businesses under the exempt category cannot reclaim input VAT, making services slightly more expensive. This new classification affects other commodities as well, including medical products, animal feeds, locally manufactured mobile phones, electric bicycles, solar batteries, and lithium-ion batteries.

With mounting concerns over businesses exploiting tax incentives for their own gain, the Treasury has proposed new enforcement mechanisms to curb misuse. The draft Finance Bill 2025 introduces penalties for companies that acquire VAT-exempt or zero-rated goods but repurpose them for unintended commercial gains. Violators would be required to pay VAT at the prevailing 16 percent rate at the time of misuse or disposal. For example, if a nonprofit organization imports medical equipment VAT-free for a donor-funded initiative but later sells it to a private entity, this transaction would trigger VAT liability.

International financial institutions, including the World Bank, have weighed in on the debate, arguing that tax rebates provide only marginal benefits to low-income groups. A 2018 report suggested that rather than offering broad tax incentives, the government should prioritize direct cash transfer programs to ensure targeted financial relief. Kenya’s struggle with price rigidity underscores the complex relationship between government incentives and market behavior. While intended to ease financial burdens on consumers, many of these measures have instead bolstered corporate profits, with regulatory oversight failing to enforce compliance.