World Bank urges 16 per cent VAT on meat, wheat flour, avocado, coffee to boost Kenya’s revenue

The World Bank has recommended a 16 per cent value-added tax (VAT) on goods such as meat, wheat flour, toothpaste, avocado and coffee, warning that their tax-exempt status is costing the country billions in lost revenue.

In its latest review, the lender argues that taxing these items would expand fiscal space without burdening the poor, as they form a minor part of low-income households’ spending.

The World Bank called on the Kenyan government to remove the products from the VAT-exempt schedule and subject them to the standard 16 per cent VAT rate. The report notes that suppliers currently do not charge VAT on these exempt items, causing the state to forgo billions in tax revenue.

“Since a big space of poor households’ shopping basket is taken up by food, most foodstuffs are either exempted or zero-rated from VAT to cushion them from a spike in price whenever there is a poor harvest,” the report, Kenya Economic Update, reads.

Largely a luxury

However, the World Bank contends that many of the food and non-food items targeted are “largely a luxury” for millions of poor Kenyans and do not occupy significant space in their spending.

Other goods the lender wants removed from the VAT-exempt list include popcorn and postal service fees.

The World Bank’s proposal adds to the Treasury’s ongoing efforts to reform the Value-Added Tax Act through the Finance Bill 2025. The Bill currently before the National Assembly’s Finance and National Planning Committee seeks to move certain goods from the zero-rated to the exempt category.

These include raw materials used in the manufacture of medical products and animal feeds, as well as the transportation of sugar from farms to milling factories.

The distinction between zero-rated and exempt goods is crucial. For zero-rated items, businesses do not charge consumers the 16 per cent VAT but pay VAT to the Kenya Revenue Authority (KRA) on inputs, which they can later reclaim as input VAT refunds. Exempt goods, by contrast, are not taxable, meaning input VAT refunds cannot be claimed.

The Parliamentary Budget Office, a think tank that advises legislators, has raised concerns about the VAT shake-up, questioning whether it represents genuine reform or merely an attempt to “clean up or cash in.”

Poverty reduction

The World Bank warns that Kenya’s slower poverty reduction compared to peers could be improved by reforming VAT exemptions to unlock vital resources for its poorest citizens.

The bank outlines three VAT reform scenarios that could help create fiscal space for more targeted social protection.

The first option involves applying the standard 16 per cent VAT to currently exempt items, a move expected to generate approximately Sh78.4 billion in additional revenue.

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The second approach proposes maintaining exemptions on goods least consumed by low-income households while reducing the overall VAT rate from 16 to 14 per cent, which could yield around Sh29.5 billion in fiscal savings, half of which could be redirected to cash transfer programmes for the poor.

The third scenario recommends retaining the current exemptions and zero-rated items but increasing the VAT rate to 18 per cent, a measure projected to raise about Sh49.1 billion, with Sh16 billion earmarked for welfare improvements.

New revenue streams

“These fiscal reforms, by freeing up resources from inefficient subsidies and generating new revenue streams from VAT, provide a sustainable pathway to scale up cash transfers,” the World Bank said.

“This expansion in coverage, coupled with adequate benefit levels, will have a significant impact on reducing overall poverty and inequality in Kenya.”

VAT exemption means consumers do not pay tax on the price of a product, making it more affordable. However, exempt goods do not allow producers to claim VAT refunds on input costs, unlike zero-rated goods.

Currently, VAT on local and imported goods remains the largest source of tax revenue for the Kenya Revenue Authority, contributing about 25 per cent of total ordinary revenues.

The World Bank stresses that reforming VAT exemptions could unlock vital funds to expand support to vulnerable populations, especially those living below the national poverty line of Sh885 per day.