Kenya strengthens tax expenditure reporting with its sixth annual report

The National Treasury of Kenya has published its 2026 Tax Expenditure Report, which estimates the revenue forgone through tax expenditures in 2025. Kenya published its first-ever tax expenditure report in September 2021, covering the 2017–2020 period, and the National Treasury, working with the Kenya Revenue Authority (KRA), has published a report every year since. This sixth consecutive report underlines the Government’s commitment to fiscal transparency.

The 2026 report was prepared through collaboration between the National Treasury and KRA, with technical support from TaxDev as part of its ongoing partnership with the National Treasury. Since the partnership began in 2025, TaxDev has worked closely with National Treasury colleagues to review existing approaches to tax expenditure reporting, identify opportunities to strengthen the methodology and coverage, and improve the presentation and use of findings. Several developments reflected in this year's report build on these collaborative efforts:

• Legal basis and rationale. Each tax expenditure is now presented with its legal basis and a short description of its policy rationale.
• VAT methodology. The report begins a phased move to the model-based approach to estimating VAT tax expenditures. Official estimates still use the returns-based approach (Kshs 188.6 billion), but an indicative model-based estimate built on Kenya’s Supply and Use Table (Kshs 155.2 billion) is published alongside it, together with estimates for individual VAT provisions.
• Wider coverage. Certain pension withdrawals and gratuities, exempted by the Finance Act 2025, are now listed as tax expenditures, and withholding tax and capital gains tax are identified for future reporting. These items are not yet costed as the data are not yet captured.

Key findings

• Total tax expenditure fell by 7.7% to Kshs 262.6 billion (1.49% of GDP) in 2025, from a revised Kshs 284.4 billion (1.75% of GDP) in 2024.
• Domestic VAT remains the largest category at Kshs 175.8 billion, or 66.9% of the total, down from Kshs 188.5 billion in 2024. Import VAT fell by 20% to Kshs 12.8 billion.
• Import duty tax expenditure fell by 75.4% to Kshs 8.2 billion, mainly due to lower revenue forgone on duty-free milled rice and raw materials for animal feed.
• Corporate income tax expenditure rose by 42.7% to Kshs 30.5 billion, mainly due to investment allowances claimed on industrial buildings. Personal income tax expenditure rose by 31.2% to Kshs 10.0 billion, driven by the exemption for persons with disabilities, and domestic excise rose by 33.6% to Kshs 18.9 billion as exemptions on completely knocked-down vehicle kits more than doubled.

Next steps

The Government plans to develop a Tax Expenditure Management Framework, setting clear eligibility criteria, policy objectives, sunset provisions and arrangements for regular monitoring and evaluation and for impact analysis of tax expenditures. The report further recommends strengthening data capture at KRA so that VAT reliefs, withholding tax and capital gains tax can be costed; continuing the phased rationalisation of the costliest VAT exemptions and zero-ratings; and progressively adopting the model-based approach for VAT. 

The full report is available at: Tax Expenditure Report 2026.

Supervised by Mr. Samuel Wambugu from the National Treasury, the report was produced by a joint team of technical staff from the National Treasury’s Macro and Fiscal Affairs Department and Kenya Revenue Authority with continued technical support from TaxDev. The team consisted of Judy Magu, Dan Borter, Silas Oure, Bernard Apind, Valerie Kerubo, Lucia Karimi, Cyrus Mutuku, Cromwel Pkomu, Douglas Mwakio, Alice Kiama, Nicholas Muvila, Veronica Maingi, Alice Achieng, Peter Langat, Gladys Cheruiyot, Daniel Kiirithio, Godfrey Mugwimi, Juddy Wewa, Beverlyne Ochieng, Joel Ndege, Ahmed Mohamed, Robert Wachira, Catherine Kalachia, Nasra Yussuf, Josphat Kahuthu, Alex Oguso and Vedanth Nair.