How Treasury's tax proposals are threatening to stall EV momentum

The country’s ambitions to green up its transport sector could be dealt a major blow if proposals in the Finance Bill, 2026, sail through Parliament.

The Bill is threatening to roll back tax incentives that have been key in growing the number of electric vehicles on Kenyan roads by shifting e-mobility components and solar technologies from VAT zero-rated to VAT exempt.

It further slaps 16 per cent VAT on imported EVs, with analysts noting that the government risks pricing its own climate goals out of reach.

Kenya has been pushing for the uptake of EVs, which is expected to clean up the transport sector and recently adopted the national electric mobility policy. The policy aims to transition the country’s transport sector, largely focusing on the matatu industry, away from heavy fossil-fuel reliance toward a low-carbon ecosystem.

The government has also given industry tax breaks, including the recent directive by President William Ruto that all EVs coming into the country would not be charged import duty. In addition to being VAT zero-rated, other incentives include an EV electricity tariff, a waiver on excise duty and lower import duties for fully built units. The government has also given similar incentives for firms setting up charging infrastructure.

The push has seen the number of EVs grow from 1,200 in 2023 to over 35,000.

The shift was also over time expected to reduce the country's petroleum import bill, which stood at Sh528.8 billion in 2025, a reduction seen as key in promoting local content, with over 90 per cent of the electricity consumed locally generated from renewable resources and only a fraction produced using heavy fuel oil.

Industry stakeholders warn that this change, if effected, could reduce the momentum that is being experienced in the matatu and boda boda sectors as well as growth in solar energy production and energy storage.

Moses Nderitu, vice president of the Electric Mobility Association of Kenya, noted the inconsistency in policy, with the industry always being on the lookout for higher taxes that the government has been proposing in every Finance Bill.

“What has been the biggest challenge for the industry is that every year we fight for an incentive, and the following year we are told it's going to be removed. This year, the proposal is moving the industry from zero-rated to exempt, which has, of course, an effect especially for those who are doing local assembly,” said Nderitu in an interview with Spice FM last week.

"If I am building a motorcycle and there are certain parts I will buy locally that I cannot then claim that input VAT, which of course I will pass on that cost to the final user. Then that means it becomes a disincentive. On the other hand, I would say, why buy local inputs when I can import from, for instance, China, as a completely knocked down kit, and I will not pay the tax.”

Industry stakeholders, in a submission to MPs last week, noted that the Bill reclassifies components such as electric buses, electric motorcycles, electric bicycles and lithium-ion batteries from zero-rated to VAT-exempt.

Under the VAT Act 2013, zero-rated supplies are cheaper as manufacturers are allowed to claim a refund on input tax. Exempt supplies, on the other hand, are not taxable, and any related input tax is therefore not deductible.

The Bill also seeks to apply the standard 16 per cent VAT directly onto imported electric vehicles, specialised parts and battery packs. While seemingly trying to protect local EV industry assemblers, the industry is reliant on imported parts, and players argue that this could stunt the industry, which is still in its fledgling stages.

“The proposal may adversely affect the growth of Kenya’s nascent and emerging green economy sectors. These sectors are still developing and may not yet have attained sufficient market maturity or economies of scale to absorb the additional costs associated with VAT exemption,” said the Institute of Certified Public Accountants of Kenya in submissions to the National Assembly Finance and Planning Committee.

READ: How fuel crisis sparked Kenya's electric cars investment frenzy

“Retaining the zero-rated status would support continued investment in clean energy and sustainable transport solutions, which are key to the country’s climate change commitments and transition to a low-carbon economy.”

The accountants’ lobby further noted that the proposal would increase the cost of electric mobility and renewable energy products for consumers and also slow down expansion and innovation within the local green manufacturing and assembly sectors, killing jobs.

Ichiban Tax and Business Advisory also told the committee to retain the VAT zero-rated status for the sector, noting that it “fosters a vibrant industry, leading to direct jobs for the youth in areas such as logistics”.

“The economic impact extends to long-term cost savings and a reduction in reliance on fossil fuels,” said the firm, adding that the impact extends beyond EVs but also includes households and businesses that are adopting solar energy to power homes and businesses, and reduce pressure on the grid, as well as firms that are looking to build utility solar power plants.

Kenya's first adopters of EVs have overwhelmingly been commercial operators in the matatu business and boda boda riders, largely attracted by lower cost of ownership offers as well as running away from volatile petrol and diesel expenses. They have, however, faced the challenge of upfront asset costs and limited credit financing; tax breaks have partly helped offset these costs.

The early adopters are perhaps reaping from lower operating costs today following the surge in fuel costs, with diesel currently at a historical high of Sh232.8 per litre in Nairobi. Electricity costs have, on the other hand, experienced a slight dip in recent months as power sector authorities increasingly rely on cheap hydro power following recent heavy rains that have filled up hydropower dams.

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While adoption is still low, growing the number of EVs on Kenyan roads is also expected to reduce the amount of money that Kenya pays to import petroleum products.

Last year, Kenya paid Sh528.8 billion in importing petroleum products, which accounted for nearly 20 per cent of the country’s total import bill of Sh3 trillion.

On the other hand, there has been a rapid growth in the number of solar power plants feeding the grid. The installed capacity for solar power plants has grown from zero a few years ago to 212.5MW last year, according to data by the Kenya National Bureau of Statistics (KNBS), accounting for about seven per cent of the total installed capacity of 3,237MW.

“The current cost of solar and lithium-ion batteries is relatively high, and reclassifying them to VAT-exempt status will lead to increased costs and a decline in sales and accessibility for consumers. Solar energy generation and storage largely support residents of the KOSAP areas in Kenya, as solar energy installations require significantly less water as compared to traditional power plants such as hydropower and geothermal plants,” said Ichiban.

“Retention of the zero rate on the solar and lithium-ion batteries fosters a vibrant local solar industry, leading to direct jobs for installers, technicians, and sales and regional agents, and indirect jobs in related services. Affordable solar energy also empowers rural entrepreneurs to start businesses like solar-powered charging stations or irrigation systems, boosting the overall economy.”

“By keeping solar affordable, Kenya rapidly transitions away from polluting energy sources like diesel generators and firewood, significantly reducing greenhouse gas emissions and improving public health. The broader economic benefits, i.e. job creation, improved health, increased environmental conservation, and reduced healthcare costs, far outweigh the foregone revenue targeted by these amendments.”