CS Mbadi Reveals Plans to End Zero-Rated VAT Status for Affordable Housing Projects

CS Mbadi Reveals Plans to End Zero-Rated VAT Status for Affordable Housing Projects

NAIROBI, Kenya — The government is proposing significant changes to the tax framework governing Kenya’s affordable housing programme, with Treasury Cabinet Secretary John Mbadi announcing plans to remove the sector from the zero-rated Value Added Tax (VAT) category and place it under a VAT-exempt status.

The proposal, which is contained in the forthcoming Finance Bill 2026, is expected to spark debate among developers, investors, and housing stakeholders as the government seeks to tighten tax administration and seal loopholes that have allegedly led to revenue losses.

Speaking on Thursday, June 11, ahead of the national budget presentation in Parliament, Mbadi defended the move, saying the existing tax incentive had outlived part of its intended purpose and was becoming increasingly difficult to monitor.

“That provision was put there to attract more investment into the affordable housing sector, but you also have to review when you tax like that, you continuously review its performance. If it is not adding much value to the economy, then it has no business being left,” Mbadi said.

Why the Government Wants the Tax Changes

The affordable housing programme remains one of President William Ruto‘s flagship projects under the administration’s broader housing agenda aimed at reducing the country’s housing deficit while creating employment opportunities.

Under the current system, affordable housing projects enjoy zero-rated VAT status, meaning developers can claim refunds on VAT paid for construction materials and related inputs.

However, according to the Treasury, the arrangement has presented major oversight challenges, particularly in tracking whether materials imported or purchased under tax incentives are ultimately used for affordable housing developments.

Mbadi noted that products such as cement, steel, roofing materials, and other construction inputs can easily be diverted to private commercial developments while still benefiting from tax exemptions intended for affordable housing.

“If you say, for example, cement for affordable housing you will not tax, how do you determine and ensure that the cement that has been bought is actually going to affordable housing and not elsewhere,” he stated.

Treasury officials argue that these monitoring difficulties have created opportunities for abuse, resulting in substantial VAT refund claims that may not accurately reflect actual affordable housing construction activities.

What VAT-Exempt Status Means

If Parliament approves the proposal, affordable housing projects will shift from being zero-rated to VAT-exempt.

While both categories reduce the tax burden on qualifying projects, there is a key distinction. Under a zero-rated system, businesses can claim refunds on VAT paid during production and construction. Under a VAT-exempt framework, those refunds are generally not available.

Tax experts say the change could significantly reduce government expenditure on VAT refunds while simplifying administration for the Kenya Revenue Authority (KRA).

The Treasury believes this approach will help safeguard public revenue while maintaining support for affordable housing construction.

Balancing Housing Growth and Revenue Collection

The proposal comes at a time when the government is under pressure to increase domestic revenue collection while simultaneously funding ambitious development programmes.

Kenya’s affordable housing initiative has already attracted billions of shillings in investment and has seen numerous projects launched across different counties.

Government officials maintain that the programme remains a key pillar of economic growth, job creation, and urban development.

However, policymakers are increasingly reviewing tax incentives to assess whether they continue delivering measurable economic returns.

Mbadi emphasized that tax incentives should not be permanent and must be subjected to regular performance reviews.

According to Treasury estimates, strengthening tax compliance and reducing opportunities for abuse could help improve revenue collection without introducing entirely new taxes on citizens.

Stakeholders Await Parliamentary Debate

The proposed changes are expected to be among the most closely watched provisions in the Finance Bill 2026.

Developers, contractors, manufacturers, and housing sector players are likely to scrutinize the proposal to determine its potential impact on construction costs, housing prices, and investment decisions.

As Parliament prepares to debate the Finance Bill, attention will focus on whether lawmakers agree with the Treasury’s argument that moving affordable housing to a VAT-exempt category will enhance accountability while preserving the government’s commitment to delivering affordable homes for thousands of Kenyans.

The outcome of the debate could significantly influence the future of Kenya’s housing agenda and the government’s broader tax reform strategy in the years ahead.

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CS Mbadi Reveals Plans to End Zero-Rated VAT Status for Affordable Housing Projects