More than 50 containers of pharmaceutical raw materials are stranded at Mombasa and the Nairobi inland depot, and manufacturers are bleeding roughly Sh1 million a day in demurrage.
The cause is not a missing law but a missing signature: until the Ministry of Health issues its approval and the new tax framework in the Finance Act 2026 is gazetted, the Kenya Revenue Authority (KRA) keeps charging the standard 16 percent VAT on these imports.
Worse, under the framework that took effect on July 1, inputs for local manufacturing are now “exempt” rather than “zero-rated” – a distinction that sounds bureaucratic but determines whether a factory can claim back the VAT it pays, or must simply eat it.
That distinction is the whole argument. A zero-rated manufacturer charges no VAT on its output but reclaims every shilling of VAT paid on inputs – raw materials, packaging, electricity, lab services, repairs. An exempt manufacturer also charges no VAT on output, but forfeits the right to claim anything back. Every shilling of input VAT becomes a sunk cost, baked into the price of the tablet or the vial.
In an industry already running below efficient scale, that is not a marginal nudge upward. It compounds against firms already carrying high fixed costs over low output, and it lands, ultimately, in the pocket of a sick citizen buying medicine.
This is where the real policy question sits: when the exchequer’s arithmetic collides with the price of a child’s antibiotic, which one gives way? It should not be a hard question. But having swallowed the International Monetary Fund’s (IMF) blanket prescription of “tax expenditures,” Kenya’s policymakers have talked themselves into treating cheap medicine and Treasury revenue as a zero-sum trade-off. It is a false choice, and the rest of the world figured that out three decades ago.
During the Uruguay Round of GATT, concluded in 1994, the world’s largest pharmaceutical producers – the US, the EU, Japan, Canada, Switzerland, Norway – signed the “zero-for-zero initiative,” eliminating tariffs on medicines and the chemical intermediates used to make them, and committing not to replace those tariffs with other barriers.
The resulting Pharmaceutical Tariff Elimination Agreement, in force since January 1995, has grown from 22 countries to cover thousands of products across 34 signatories.
That was not sentimentality. It was a hard-nosed decision by the world’s most fiscally sophisticated economies that medicine is not a normal traded good to be milked for customs revenue – that health access trumps fiscal opportunism, even for governments perfectly capable of taxing trade if they chose to.
Kenya never signed that agreement – it was negotiated among producers seeking reciprocal market access – but the principle behind it has since surfaced in World Health Organisation guidance, in World Trade Organisation TRIPS (The Agreement on Trade-Related Aspects of Intellectual Property Rights) flexibilities, and in the tax codes of most functioning health systems: essential medicines are merit goods, not revenue lines.
Governments that tax them anyway do so quietly, and pay for it later in worse health outcomes and higher out-of-pocket spending.
It is as if Kenyan tax policy has forgotten Covid-19 entirely. When global supply chains seized in 2020, the countries that suffered most were those with no domestic capacity to make even basic health commodities.
Kenya imports over 70 percent of the pharmaceuticals it consumes and more than 95 percent of active pharmaceutical ingredients, almost all from India and China. The obvious response should have been to build local capacity deliberately, through the tax code as much as industrial policy.
Instead, Kenya’s tax trajectory has run the other way – even as the government proclaims a 2023 presidential directive to produce 50 percent of essential medicines locally, and a 2026-2030 strategy to lift capacity utilisation to 70 percent.
A tax code working against those targets while industrial policy claims to chase them is not an oversight; it is incoherence dressed up as fiscal discipline. None of this makes the Treasury’s position baseless.
The fiscal deficit is real, and zero-rating regimes are, by Treasury’s own reckoning, costly and prone to abuse through fraudulent refund claims – a case the IMF and tax administrators make consistently.
A narrower toolkit of direct subsidies, tariff protection on APIs, or capital allowances might achieve the same industrial goal with less leakage.
These are legitimate technical debates.
What cannot be debated is the objective: a tax system that makes medicine costlier and local production less viable is moving in exactly the wrong direction, and every day of the delays the local pharmaceutical manufacturing industry is currently experiencing at the at the Mombasa port, is proof of it.