Medicine prices set to rise in July due to new tax policy

The Kenya Association of Manufacturers (KAM) has expressed concern over a provision in the Finance Bill 2025 that may lead to a price increase of essential medicines by as much as 5%, effective from July 1.

The proposed legislation aims to alter the VAT classification of raw materials and inputs used in the production of pharmaceuticals, shifting them from a "zero-rated" to an "exempt" status.

Manufacturers warn that although the change may seem minor, it carries significant cost implications.

Currently, under the zero-rating system, they can reclaim VAT paid on inputs like electricity, warehouse rent, and other operational expenses.

However, with the shift to exempt status, manufacturers will lose the ability to recover these costs, meaning they will either have to absorb the expenses themselves or pass them on to consumers.

Data from the Kenya Association of Manufacturers (KAM) reveals that if the Finance Bill 2025 is enacted, manufacturers’ costs could increase from Sh1,500 to Sh1,580.

With a typical 12% markup, retail prices of medicines would rise from Sh1,680 to Sh1,770—an overall 5% increase.

Industry experts warn that this price hike would disproportionately affect low-income households, restricting their access to vital medications and potentially reversing gains toward Kenya’s universal health coverage goals.

KAM and other stakeholders are urging the government to reconsider the proposal to safeguard both consumers and the local pharmaceutical industry.

Fred Kimotho, Associate Director at Deloitte Kenya, explained that while zero-rated goods do not attract output VAT, they enable suppliers to reclaim input VAT from the Kenya Revenue Authority (KRA).

He noted that although zero rating and exempting goods might seem similar to the average person, the key difference lies in how VAT operates as a pass-through tax ultimately paid by the final consumer.

This mechanism depends on suppliers’ ability to offset input VAT against output VAT, which changes under the proposed tax adjustment.