The Kenya Association of Manufacturers (KAM) has raised concerns that the prices of medicines could rise by up to Ksh90 if the new tax measures proposed in the Finance Bill 2025 are passed.
According to the association, these changes in tax policy could cause medication prices to increase by at least 5 percent beginning July 1, 2025.
During their final presentation at the end of the Finance Bill 2025 public hearings last Friday, KAM strongly objected to a proposal that seeks to change the Value Added Tax (VAT) treatment of pharmaceutical inputs.
Specifically, the proposal recommends shifting these inputs from being zero-rated to exempt.
Currently, under the zero-rated system, pharmaceutical manufacturers enjoy two major benefits: they don’t charge VAT on their final products, and they can also reclaim VAT paid on raw materials such as chemicals, packaging, and other essential inputs.
This system helps to reduce production costs significantly, which in turn helps to keep the price of medicines affordable for the average Kenyan.
However, if the proposed changes in the Finance Bill are implemented, pharmaceutical inputs will be categorized as VAT-exempt instead of zero-rated.
While this still means that manufacturers won’t charge VAT on the finished products, they will no longer be allowed to claim back the VAT they pay on the raw materials used in production.
This shift would mean that manufacturers have to absorb the VAT cost on locally sourced or imported raw materials.
These extra expenses would increase the overall cost of manufacturing, and as a result, the added costs are likely to be transferred to consumers through higher retail prices.
KAM explained that this change would make it more expensive for local pharmaceutical companies to operate, which could lead to an increase in the price of essential medicines. According to their analysis, consumers could end up paying Ksh90 more for each unit of medicine, translating to a 5 percent rise in prices across the board.
In addition to the VAT status changes, the Finance Bill 2025 also proposes to shorten the period businesses have to claim VAT refunds from the current 24 months to just 12 months.
Presently, businesses that pay more VAT than they owe have two years to file a claim for a refund.
The government believes this change will encourage businesses to maintain strict tax records and file their claims more quickly. However, it also means that any unclaimed VAT beyond the 12-month window will be lost.
Another significant change affects businesses that engage with government entities or other organizations with delayed payments.
Under the current system, if such businesses don’t receive payment on time—like in cases involving pending bills—they can still claim VAT refunds within a three-year window. The proposed Finance Bill reduces this timeframe to two years.
Although this change will allow some businesses to use unpaid taxes to offset other VAT obligations, which could be beneficial for those with tax liabilities, it poses a serious challenge for businesses that rely on long credit periods or experience delays in receiving payments.
In conclusion, KAM has warned that these tax proposals could lead to increased medicine prices and place a heavier financial burden on both manufacturers and consumers.
They are urging lawmakers to reconsider these changes in order to protect local industries and ensure essential medicines remain accessible to all Kenyans.
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