Ruto's fiscal plan faces fresh acid test as MPs poke holes in tax proposals

The National Assembly's Committee on Finance and National Planning has sharply broken ranks with President William Ruto’s administration, systematically poking holes in a raft of aggressive tax measures and recommending the deletion or softening of central proposals in the government's latest revenue-raising plan.   

The dramatic pushback sets up a major legislative battle between lawmakers and an Executive desperate for cash to fund a growing budget deficit. 

Perhaps taking cues from the Gen Z led protests of 2024, the Committee differed with some of Treasury’s proposals in the Finance Bill 2026.

Though minimalist in terms of new tax measures, the Bill had contained tax administrative measures that were projected to raise an additional Sh120 billion in revenues to fund the Sh4.82 trillion budget and would have nevertheless caused a strain for Kenyans. 

The rejection of many of the proposals signals deep political anxiety among MPs over a potential public revolt against a cash-strapped government.   

The committee’s sweeping review marks a significant setback for Ruto, who rose to power on a populist "Hustler" platform, promising to improve business conditions, create jobs and rein in the runaway cost of living.

Burdensome tax regime

Additionally, the committee also appears to question government’s promise of a predictable tax regime contained in the National Tax Policy that it started implementing in 2024. 

The legislative revolt unfolds at a critical juncture when local businesses and Kenyan households find themselves hard-pressed by stagnant economic growth, high inflation and a burdensome tax regime.

By siding with corporate stakeholders and consumer advocates to blunt the State's tax offensive, lawmakers are signalling that the public's tolerance for fiscal pain has hit its absolute limit. 

The committee’s report was not compiled overnight. It is the culmination of an intensive legislative process mandated by the Constitution, which requires rigorous public participation before any tax laws are enacted. 

Among the most significant rollbacks in the report is the committee’s outright rejection of the Executive's plan to reclassify vital sectors such as animal feeds and pharmaceutical inputs from "Zero-rated" to "Exempt" status, which would have seen a sharp increase in cost of essential goods. 

“The committee recommended retaining the zero-rated status,” it stated in its report tabled in Parliament Tuesday, noting that the move would have seen a rise on locally assembled and manufactured items such as mobile phones, electric vehicles, solar and lithium-ion batteries as well as the transportation of sugar cane from farms to milling and animal feeds. 

“The committee observed that these items were recently granted zero-rated status under the Finance Act 2023 to support local manufacturing and reduce the cost of essential goods. Reversing this position would increase production costs, discourage investment and undermine predictability in the tax system.” 

Under a Zero-rated status, a business charges zero per cent VAT on its final product but is legally allowed to fully claim refunds from KRA on the VAT it paid on raw materials.

When a product is reclassified as VAT Exempt, the business charges no VAT to the consumer, but it cannot claim refunds on the tax spent on its inputs. This forces companies to absorb the hidden production costs or pass them on to consumers through higher prices. 

The committee also rejected proposals that would have removed VAT exemptions for the green mobility sector, effectively saving electric motorcycles and bicycles from price hikes.   

The committee also rejected Treasury’s proposed 60 per cent "deemed dividend distribution threshold", which occur when a tax authority legally treats a company's retained, undistributed profits as if they had already been paid out to shareholders as dividends. The government then levies a withholding tax on that imaginary payout. 

The Executive had sought to force companies to distribute their profits or face heavy taxation. However, committee members strongly disagreed with the stance. 

"It acknowledged the concerns raised by stakeholders and agreed that the proposed introduction of a 60 per cent deemed dividend distribution threshold would impose an unnecessary burden on businesses," the committee stated, noting it would severely limit their ability to retain earnings for reinvestment.

"The committee deemed it appropriate to moderate the proposal to strike a balance between revenue protection and business flexibility."   

In a major reprieve for technology and eco-mobility sectors, the parliamentary team agreed to completely delete a proposed excise duty—a selective tax applied to specific items, often referred to as a "sin tax" or a luxury tax—on mobile devices.  

Members noted the critical need to "protect local manufacturing of telephones" rather than choking the young sector with high tariffs.   

The committee, chaired by Molo MP Kuria Kimani, arrived at its final recommendations following extensive public hearings and stakeholder submissions.

Over several weeks, institutional giants such as Kenya Bankers Association (KBA), PricewaterhouseCoopers (PwC), Grant Thornton, the Institute of Certified Public Accountants (ICPAK) and Andersen, laid bare the potential economic fallout of the Executive’s proposals.   

After gathering this extensive evidence, the MPs retreated to cross-examine each clause of the Bill against the backdrop of the country's fragile macroeconomic realities.

The resulting consensus report balances the State's revenue needs against the private sector's survival. 

Analysts say driving the lawmakers' aggressive pushback is a palpable anxiety to avoid a repeat of the political ghosts of 2024, when allegations of a tone-deaf, aloof parliament rubber-stamping punitive executive policies ignited historic youth-led Gen Z protests.  

Some lawmakers in the Finance committee told The Standard anonymously that they are keenly aware that passing a heavily contested Finance Bill without major concessions could re-trigger the civil unrest that previously paralyzed major cities, forcing them to tread cautiously between the Ruto government fiscal demands and a volatile, highly vigilant electorate. 

"Our role is to listen to the people and ensure that the tax policies passed are sensitive to the continuity of business, implementable, and fair," Kimani observed during the stakeholder review process.

"We must strike a balance between expanding the tax base and protecting the very entities that generate that revenue." 

The report reveals profound parliamentary discomfort with what stakeholders characterized as overly aggressive tax administration mechanisms. 

The committee recommended watering down a proposal to enforce automated, Pre-populated Tax Returns. Under this framework, the Kenya Revenue Authority (KRA) uses third-party electronic data to fill out tax returns for citizens automatically.

Lawmakers insisted that safeguards must be introduced, allowing taxpayers the explicit right to review, accept, or object to the state's automated determinations rather than accepting them blindly.   

The MPs further moved to slash proposed penalties aimed at forcing businesses onto electronic tax management systems, replacing a draconian fine of "two times the tax due" with a more proportional penalty of five percent of the tax due.   

They also killed a highly controversial proposal that would have allowed the KRA to collect taxes based on "disputed decisions."

Stakeholders successfully argued that forcing taxpayers to pay up even while an appeal was active in court directly violated constitutional rights to fair administrative action.   

Despite the extensive rollbacks, President Ruto’s administration however managed to maintain its ground on several key structural tax shifts.   

The committee backed the government’s introduction of a General Anti-Avoidance Rule (GAAR). GAAR gives the tax collector sweeping powers to invalidate transactions or business structures designed solely to reduce tax liability, though MPs insisted that the KRA must provide written, substance-over-form justifications for doing so.   

The government also successfully defended its move to remove the preferential five per cent withholding tax rate on dividends paid to East African Community (EAC) citizens, raising it to promote equity across the tax system.  

Additionally, the committee agreed to block an amendment that would have accelerated tax refund payouts to 60 days, warning that compressing the timeline would "strain administrative capacity and heighten fiscal risk" by allowing fraudulent refund claims to slip through without proper verification checks.   

The MPs also yielded to giving KRA sweeping powers in determining taxpayers’ liabilities albeit requiring th taxman to disclose evidence when issuing tax assessment. 

The Finance Bill proposed giving KRA significant powers to independently determine tax liabilities, issue pre-emptive assessments using third-party data such as bank records and M-Pesa transactions, while bypassing the bypass traditional appeal shields by issuing agency notices to freeze bank accounts. 

The MPs noted that while the proposal would strengthen tax administration, they however had reservations on the extent it would violate taxpayers’ rights.  

“The committee recommended the introduction of a section 29A to the Tax Procedures Act requiring the Commissioner to disclose the information sources and computations relied upon in issuing an assessment,” reads the report. 

“The Committee further recommended that such disclosure be a condition for validity of the assessment and that, where disputed, the Commissioner bears responsibility of demonstrating the accuracy and reliability of the information used.”  

The committee has also proposed increasing resources to KRA to enable it meet collection revenue targets, noting that it has been facing constraints in financing revenue mobilisation activities.

The MPs recommend increasing the agency fee that KRA earns from collecting the Affordable Housing Levy to two per cent from the current 0.5 per cent.  

“To enhance the capacity of the Authority to undertake revenue mobilisation initiatives, the Committee recommended measures to provide additional resources for effective tax administration. In this regard, the Committee proposed an amendment to the Affordable Housing Act to adjust the affordable housing levy contribution from the current rate of 0.5 per cent to a maximum rate of two per cent,” reads the report. 

KRA, which also collects other levies on behalf of government entities, will also have its power enhanced to allow it to collect levies and other such charges. These include the review of the Tax Procedures Act to empower KRA to recover unpaid levies as a civil debt “in the same manner as unpaid tax under tax law”.

In instances where the money owed is under Sh100,000, the Committee has proposed that “the debt may be recovered through a summary recovery process”.  

The Committee also partially agreed with Treasury on reducing the time required to file tax returns, maintaining Treasury’s proposals requiring individuals to file returns by April 30 but retained the deadline for companies at June 30.  

The report now heads to the floor of the National Assembly, where lawmakers will debate and vote on the amendments. After passing through Parliament, the Bill will be forwarded to the President for assent.