The government has rolled out a Sh4.8 trillion budget for the 2026/27 financial year, banking on higher revenue collection, fresh tax measures and increased borrowing to fund its spending plans amid a projected deficit of Sh1.146 trillion.
Presenting the Budget Statement in Parliament, Treasury Cabinet Secretary John Mbadi said the government expects to collect Sh3.631 trillion in total revenue, including Appropriations-in-Aid (A.I.A), while grants are projected at Sh44 billion.
Even with the expected revenue and grants, the budget will still face a financing gap of Sh1.146 trillion, forcing the government to seek both local and foreign borrowing to bridge the shortfall.
According to Treasury projections, net foreign financing will amount to Sh116 billion while net domestic financing is expected to reach Sh1.03 trillion, making local borrowing the biggest source of funding for the deficit.
To support revenue collection and strengthen government finances, the Treasury has proposed a range of tax changes covering Value Added Tax (VAT), income tax, excise duty and customs duty.
Under the VAT proposals, mitumba imports will attract VAT only at the point of importation, while local sales will remain exempt. The duty-free baggage allowance for travellers has also been raised from USD 300 to USD 2,000, a move aimed at easing the tax burden on passengers.
The budget further proposes VAT exemptions for large commercial aircraft and spare parts, dialyzers used in kidney treatment, public-private partnership projects and scrap metal.
In the area of income tax, the government is seeking to exempt Capital Gains Tax and Stamp Duty on property transfers into approved Real Estate Investment Trusts (REITs), a measure intended to encourage investment.
The Treasury has also proposed reducing the corporate tax rate for non-resident petroleum contractors from 37.5 per cent to 30 per cent. It has further clarified the application of a 15 per cent tax on repatriated income earned by petroleum firms.
Additional income tax proposals include a simplified tax framework for non-resident landlords, changes to filing deadlines for individual income tax returns, a 20 per cent withholding tax on lottery and prize winnings and a 1.5 per cent withholding tax on scrap metal transactions.
The excise duty proposals combine revenue raising with public health and environmental goals.
Bottled water will be exempt from excise duty, making it cheaper for consumers, while taxes on sugar-sweetened drinks will rise from Sh14.14 per litre to Sh20 per litre.
"In recognition of the health associated with excessive sugar consumption, the Bill proposes to increase excise duty on sugar-sweetened beverages from KSh 14.14 per litre to KSh 20 per litre," said Mbadi.
The government also plans to streamline taxes on mobile phones by introducing a single 25 per cent excise duty charged when a device is activated, replacing the current system that applies multiple tax layers.
As part of efforts to support environmental protection, a 10 per cent excise duty will be imposed on imported and locally manufactured plastic products.
In the alcohol sector, excise duty on Extra Neutral Alcohol will be reduced from Sh500 to Sh80 per litre. At the same time, tax advantages previously granted to small independent brewers will be removed in an effort to create a fair tax regime across the industry.
The budget also introduces customs duty changes aimed at supporting local manufacturing and agricultural production.
Inputs used in the assembly of smart telecommunications devices will be imported duty-free, while raw materials used to make motorcycle parts will also enjoy duty relief. Completely Knocked Down motorcycle kits will qualify for a 10 per cent duty remission.
To shield local industries from imported competition, finished textile products will attract a 35 per cent import duty. Selected processed agricultural goods will also face a 35 per cent import duty as part of efforts to encourage local production and create jobs.
The Treasury has further proposed reducing the duty on wheat imports under remission to 10 per cent from the current 35 per cent. Rice imports will continue attracting a 35 per cent duty instead of the previous 75 per cent rate, while public-private partnership projects will benefit from customs duty exemptions.
Treasury says the combination of tax reforms, improved compliance and borrowing will provide the resources required to finance the Sh1.146 trillion deficit while supporting key sectors of the economy, including health, agriculture, manufacturing and infrastructure.