Last Updated 2 hours ago by Kenya Engineer
Kenya’s Finance Act 2026 is not only a tax law. From an engineering and infrastructure perspective, it is also a project-cost instrument, a procurement risk document, an industrial policy signal, and a compliance framework that will affect how engineers, contractors, manufacturers, developers, financiers and public agencies prepare budgets for capital-intensive projects.
Grant Thornton Kenya’s analysis describes the Act as a package of enacted tax and trade measures aimed at improving revenue collection, strengthening tax administration, broadening the tax base and facilitating trade. The analysis further notes that several proposals were retained, amended or dropped during the legislative process, making the final Act important for practical business and project planning.
For engineers, the central question is not simply “what tax changed?” The more practical question is: how do these changes alter the cost, timing, risk and bankability of projects? In engineering terms, the Finance Act 2026 affects four major areas: capital expenditure, operating expenditure, procurement documentation, and project cash flow.
The engineering meaning of the Act
Every engineering project eventually becomes a budget. A transmission line, road, LPG storage facility, manufacturing plant, water treatment works, data centre, hospital, school, industrial park or housing estate is translated into a bill of quantities, procurement schedule, cash-flow projection, risk register, contract price and financing model.
The Finance Act 2026 changes the assumptions behind some of those numbers. It gives relief to some strategic infrastructure projects, increases the cost of certain imported materials, expands withholding tax exposure on technical and digital services, and strengthens tax administration requirements for importers and businesses. Grant Thornton’s summary identifies investors and manufacturers, REITs, financial institutions, taxpayers with historical arrears, and strategic infrastructure projects as some of the “winners”, while importers, aggressive tax planning structures, digital economy participants, virtual asset service providers and the gambling sector face greater burdens.
For the engineering profession, this means cost consultants, project managers, procurement officers and design teams will need to integrate tax assumptions much earlier in the project lifecycle. Tax can no longer be treated as an accounts department issue that arises after procurement. It is now part of front-end engineering design, feasibility studies, tender preparation, contract drafting and project risk management.
Strategic infrastructure: a clear area of relief
One of the most important positive signals in the Act is the support given to strategic infrastructure projects, especially those implemented under a public-private partnership framework. The Act provides VAT exemption for services supplied for the direct and exclusive use in the implementation of infrastructure projects undertaken under a PPP framework, subject to the necessary Cabinet Secretary approval and recommendation process. Grant Thornton notes that this reduces project implementation costs for qualifying PPP infrastructure projects.
This is significant because VAT can affect the upfront cost of large projects, especially where the project company or implementing agency is unable to fully recover input VAT. In a PPP road project, water project, port facility, energy infrastructure development or urban transport system, a VAT exemption on qualifying project services can improve affordability, reduce the viability-gap funding requirement, or improve the project’s internal rate of return.
However, the relief is not automatic. The wording “direct and exclusive use” is important. Engineers and procurement teams must separate eligible project items from general overheads, shared services and unrelated supplies. A contractor working on a PPP project should not assume that every invoice connected to the project is exempt. The project budget should therefore include a tax eligibility schedule showing which goods and services qualify, which do not, what approval is required, and what documentation must be retained.
In practical terms, feasibility studies and BOQs for PPP projects should now include a tax column alongside the usual material, labour, plant and overhead columns. Project managers should also require suppliers to identify whether a supply is exempt, taxable, zero-rated or outside the exemption. Without this discipline, the benefit may be lost during audit or, worse, disputed after payment.
LPG storage: energy security meets fiscal incentive
The Act gives special attention to liquefied petroleum gas storage infrastructure. It provides VAT exemption for taxable services used in the construction of LPG storage tanks and related infrastructure where the investment amounts to at least KSh 5 billion and is recommended by the Cabinet Secretary responsible for energy. Grant Thornton’s analysis states that qualifying LPG storage infrastructure projects will not incur VAT on eligible construction-related services, thereby reducing project development costs and encouraging investment in energy infrastructure.
The Act also expands exemptions under the Miscellaneous Fees and Levies framework to include goods used in the construction of LPG storage tanks and related infrastructure, subject to the same KSh 5 billion investment threshold and Cabinet Secretary recommendation. This potentially reduces Import Declaration Fee and Railway Development Levy exposure for qualifying LPG projects.
From an engineering budget perspective, this is important in three ways.
First, it lowers the cost of developing major midstream energy infrastructure. LPG storage requires civil works, tank fabrication, piping, safety systems, firefighting systems, instrumentation, control systems, truck loading facilities, electrical works and environmental safeguards. A tax relief on qualifying goods and services can materially improve project economics.
Second, the threshold means the benefit is targeted at large-scale infrastructure, not small retail LPG installations. This points to a policy intention to support national or regional storage capacity, not merely ordinary commercial installations.
Third, engineers must design the procurement structure carefully. If the exemption applies only to qualifying goods and services used directly in the LPG storage infrastructure, then mixed-purpose procurement can create compliance problems. For example, a package that combines eligible tank works with non-eligible office facilities, unrelated vehicles or general corporate equipment may need to be split for tax clarity.
Coal and the energy transition: fiscal pressure on carbon-intensive options
The Finance Act 2026 introduces excise duty on coal at 5% of the excisable value. From an environmental and engineering planning perspective, this is a notable signal. Coal may still appear attractive in some industrial energy models because of fuel cost or baseload capability, but the new excise duty adds a fiscal cost that engineers and energy planners must include in lifecycle costing.
This matters for industries such as cement, heavy manufacturing, steam generation and captive power planning. A power or process-heat option that appeared cheaper before tax may look different once excise duty, emissions obligations, financing risk, equipment maintenance and future policy uncertainty are considered.
For engineers preparing energy audits, feasibility studies or alternative power designs, the Act strengthens the case for proper lifecycle analysis rather than simple fuel-cost comparison. Coal-based systems should be evaluated against LPG, biomass, grid power, geothermal-linked supply, solar plus storage, waste heat recovery, and hybrid systems. The Finance Act does not by itself determine the correct engineering solution, but it changes the cost equation.
Construction materials: imported finishing and timber-based products become more expensive
The Act introduces or adjusts excise duty on a number of imported construction-related materials. Imported ceramic sinks, wash basins, pedestals, baths, bidets, water closet pans, flushing cisterns, urinals and similar sanitary fixtures now attract 5% of excisable value or KSh 50 per kilogram, whichever is higher. Imported ceramic flags, paving, hearth or wall tiles, unglazed ceramic mosaic cubes and finishing ceramics are also affected, with the rate stated as 5% of excisable value or KSh 50 per kilogram, whichever is higher.
The Act further imposes 30% of excisable value on imported MDF, particle boards, block boards and plywood. Imported timber under the specified tariff number also attracts 30% of excisable value.
This has direct consequences for building projects. Hotels, hospitals, schools, offices, apartments, malls and public facilities all use sanitary ware, tiles, timber products, boards, partitions, cabinetry and interior finishes. A 30% excise duty on imported board products can significantly alter the cost of joinery, ceilings, furniture, interior partitions and fit-out works.
For quantity surveyors and project engineers, the key implication is that old rate libraries and historical cost data may no longer be reliable. BOQs prepared before the Act may understate costs where imported timber-based products or imported finishes are involved. Contractors may also price in uncertainty, especially where tender documents do not clearly allocate responsibility for tax changes.
This should encourage three practical responses. First, engineers should review material specifications to distinguish between imported and locally available alternatives. Second, project teams should revisit provisional sums and prime cost items for finishes. Third, contracts should include clear tax-change and price-adjustment clauses, particularly for projects with long procurement timelines.
Local manufacturing: opportunity, but only if quality keeps pace
The higher tax burden on selected imported materials may support local manufacturing by making imported alternatives less price-competitive. In principle, this can benefit Kenyan manufacturers of timber products, sanitary ware, tiles, boards, plastic products and construction components.
However, tax protection alone does not create industrial competitiveness. For engineering projects, local substitution must still meet technical standards, durability requirements, fire performance, moisture resistance, dimensional stability, safety codes and warranty conditions. A cheaper local substitute that fails prematurely can increase lifecycle cost and create safety or maintenance problems.
The Act should therefore be interpreted as an opportunity for local industry, but not as permission to lower engineering standards. Public procurement agencies, consultants and contractors should continue to specify performance-based standards. Local content should be encouraged where it is technically fit for purpose, certified, available at scale and supported by reliable after-sales service.
Imported banners, PVC sheets and shower heads: small items, visible cost effects
The Act also introduces excise duty on imported unprinted banner sheeting, flex banner and unprinted PVC sheeting at KSh 200 per kilogram or 35% of excisable value. Imported shower heads, including units fitted with heating elements, attract 35% of excisable value, as do imported heating elements used exclusively in the manufacture of shower heads.
These may look minor compared to major infrastructure items, but they matter in aggregate. PVC sheets and banner materials are used in signage, site branding, advertising, temporary works, wayfinding, public communication and commercial fit-outs. Shower heads and heating elements affect residential, hospitality, institutional and commercial building budgets.
For large housing projects, hostels, hotels or institutional developments, repeated small components can become material cost lines. Engineers and QS teams should therefore avoid treating these items as negligible. They should be captured in MEP, architectural and finishing schedules where quantities are significant.
Scrap metal: recycling, demolition and fabrication need tighter documentation
The Act brings scrap metal more clearly into the tax net. It includes the sale of scrap metal as income deemed to accrue in or derive from Kenya and introduces withholding tax on scrap metal sales at 1.5% of the gross amount.
This affects engineering in several ways. Demolition contractors, fabrication workshops, road contractors, steel processors, utility maintenance teams, industrial plants and recycling businesses often generate scrap metal from old structures, equipment, reinforcement offcuts, decommissioned plant, poles, pipes, cables and machinery.
The budget impact may not be large on every project, but the compliance implication is important. Scrap disposal should be formally documented. Project managers should record source, weight, buyer, value, tax treatment and approval for disposal. In public projects, this also helps reduce leakage, theft and disputes over asset ownership.
For circular economy and materials recovery initiatives, the Act creates a clearer tax trail. This can support more formal recycling markets, provided compliance does not become too burdensome for small operators.
Engineering software, automation and digital platforms: a hidden cost centre
One of the most important changes for modern engineering firms is the expanded definition of royalty. The Act expands royalty to include payments for the use or right to use software, including licence, development, training, maintenance and support fees, as well as industrial, commercial or scientific equipment, know-how and proprietary digital platforms. Grant Thornton warns that this may widen the range of domestic and cross-border payments subject to withholding tax and increase disputes over whether payments are service fees or royalties.
This is highly relevant to engineering because design, construction and operations are now software-intensive. Engineering firms and asset owners routinely pay for CAD, BIM, GIS, SCADA, PLC programming tools, simulation software, cloud monitoring platforms, digital twins, energy management systems, cybersecurity tools, ERP systems and equipment support contracts.
The budget risk is that a foreign software or equipment supplier may quote a net amount and expect the Kenyan client to bear any withholding tax through a gross-up clause. A contract that looked affordable at procurement stage may therefore become more expensive once withholding tax is applied.
Engineering procurement teams should review all software and technical support contracts before signing. They should separate licence fees, implementation fees, training, maintenance, cloud hosting, equipment rental, technical support and consulting services. This separation matters because each component may have a different tax treatment.
The Act also expands the definition of management or professional fees to include interchange fees and merchant service fees arising from card transactions. For engineering projects involving smart ticketing, parking systems, tolling, vending, utility billing, e-mobility charging, metering platforms and digital payment infrastructure, transaction fees may now need closer tax review.
VAT on digital payment and transaction processing services
The VAT amendments also affect the digital infrastructure around engineering systems. The Act exempts certain dealings with money and money transfer services, but excludes services such as payment processing, settlement, merchant acquiring, gateway or aggregation services supplied over software or platforms for a fee or commission by a payment service provider. Grant Thornton notes that digital payment and transaction processing services supplied for a fee or commission will become subject to VAT, potentially increasing the cost of such services.
This is relevant to projects where revenue collection is digital. Examples include expressway tolling, smart parking, prepaid water systems, electricity vending, bus rapid transit ticketing, e-mobility charging, student accommodation access systems, smart buildings and public service payment platforms.
The engineering budget should therefore go beyond hardware. It must also include platform fees, transaction fees, tax on payment services, integration costs, cybersecurity, data hosting and maintenance. A technically sound system can still fail commercially if its transaction cost structure is not properly modelled.
Imported plant and equipment: documentation becomes part of engineering procurement
The Act introduces a major compliance requirement for importers. A person who imports, or claims to have imported, goods into Kenya must obtain and retain export documentation from the country of export, including export declarations, export entries, customs export certificates or other documents evidencing lawful exportation. The documentation must contain details such as exporter and importer information, description of goods, value, tariff classification, countries of export and destination, date of exportation and reference number assigned by the customs authority of the exporting country.
This is especially important for engineering projects that depend on imported plant, equipment and specialised materials. Substations, transformers, turbines, pumps, lifts, HVAC systems, laboratory equipment, medical equipment, control panels, switchgear, meters, valves, industrial machinery and instrumentation often come from multiple countries through agents, distributors or EPC contractors.
From 1 September 2026, procurement teams must treat export documentation as a mandatory part of the import file, not an optional customs matter. If the foreign supplier cannot provide the required documents, the Kenyan importer may face problems substantiating import value, origin, tariff classification or tax claims.
This affects tendering. Employers and consultants should require bidders to confirm whether imported equipment will be supplied with full export-country documentation. EPC contracts should make this a supplier obligation. Payment milestones may also need to be tied to complete customs documentation, not merely shipment.
Transport services and project logistics
The Act expands withholding tax from “travel” to “transport services”, thereby broadening the scope of payments subject to withholding tax. This may affect project logistics, especially for contractors who rely on transporters for materials, plant mobilisation, heavy lifting, abnormal loads, imported equipment haulage and site-to-site movement.
Transport is a major line item in infrastructure projects. In roads, power, water, building and industrial projects, the cost of moving materials and equipment can be significant. If withholding tax applies more broadly to transport services, contractors must manage supplier contracts, payment certificates and tax deductions carefully.
For tender pricing, this means transport costs should be reviewed with tax treatment in mind. It may also affect subcontractor cash flow, particularly smaller transporters who operate on thin margins and expect full payment without withholding deductions.
Hire purchase and equipment financing
The VAT amendment relating to hire purchase agreements provides that financial charges payable in relation to the supply of credit under qualifying hire purchase agreements will not be subject to VAT.
This is useful for contractors and SMEs acquiring equipment through hire purchase arrangements. Construction firms, drilling companies, fabrication workshops, agricultural engineering businesses and transport operators often rely on hire purchase to acquire plant and machinery.
If finance charges under qualifying hire purchase arrangements are not subject to VAT, equipment acquisition through structured credit may become more attractive. However, firms must confirm that the hire purchase provider is properly licensed and that the agreement meets the required legal conditions.
For engineering SMEs, this could improve affordability of equipment such as compressors, welding machines, small excavators, concrete mixers, drilling rigs, generators, trucks and workshop machinery.
Input VAT clawback: inventory risk for suppliers
The Act introduces a provision requiring adjustment of input VAT on unsold stock where taxable supplies become exempt. Grant Thornton notes that input VAT claimed on unsold stock will be clawed back where the underlying supplies subsequently become exempt.
This matters to suppliers of engineering materials and equipment. A company holding inventory of products whose VAT status changes may face an unexpected tax liability. The issue is especially relevant to suppliers with large stocks of slow-moving items such as electrical components, imported equipment, industrial consumables, construction materials or spare parts.
Engineering suppliers should therefore improve inventory classification. Stock ledgers should identify tax status, purchase date, input VAT claimed, sales category and whether the item is affected by a change in tax treatment. Without this, a business may underestimate its working capital requirement.
Tax administration: stronger KRA powers and data-driven enforcement
The Act gives KRA stronger assessment and enforcement powers. Under the Tax Procedures Act amendments, the Commissioner may issue assessments based on information obtained from third-party data, electronic systems, audits, inspection and other statutory sources. The Act also introduces a broader anti-avoidance framework, allowing the Commissioner to determine that a person has entered into a tax avoidance scheme, reassess liability as if the scheme had not been entered into, and issue an assessment within five years from the last day of the tax period.
For engineering firms, this creates a need for better record discipline. Project cost allocations, intercompany charges, equipment leases, foreign technical support fees, software licences, material imports, subcontractor payments, VAT exemptions and withholding tax positions should all be documented.
The days of treating tax files separately from project files are ending. A well-managed engineering project should maintain a combined technical-commercial-compliance record. This includes contracts, BOQs, invoices, delivery notes, import documents, approvals, exemption certificates, payment certificates, variation orders and tax deductions.
Tax amnesty: opportunity to clean up legacy exposures
The Act extends the tax amnesty framework. Grant Thornton’s analysis notes that the amnesty extends deadlines and provides for waiver of penalties and interest once the principal tax is paid.
This may be important for contractors and engineering firms with historical tax issues. Some firms carry old penalties from VAT disputes, PAYE errors, withholding tax omissions, customs issues or delayed returns. These legacy exposures can affect tender eligibility, tax compliance certificates, bank financing and investor confidence.
For the engineering sector, the amnesty should be viewed as a balance-sheet clean-up opportunity. Firms that depend on public tenders, donor-funded projects or bank facilities should consider resolving historical exposures before they interfere with future work.
Real estate, REITs and infrastructure finance
The Act supports Real Estate Investment Trusts through capital gains tax exemptions and stamp duty reliefs on qualifying property transfers. Grant Thornton notes that transfers of property to qualifying REITs will not attract capital gains tax, facilitating the establishment and growth of REIT structures. The Stamp Duty Act amendment further extends exemption to instruments that convey or transfer beneficial interest in property to a REIT, reducing transaction costs and facilitating property transfers into REIT structures.
This has implications for engineering because real estate finance often determines whether projects are built. REIT-friendly tax treatment can support housing, commercial property, logistics parks, industrial parks, student accommodation and mixed-use developments.
For engineers, this may create more demand for technically bankable projects: projects with clear designs, realistic lifecycle costs, strong maintenance plans, energy efficiency, compliance with building codes and transparent project documentation. Investors will not only look at land value; they will look at operational performance, maintenance risk and long-term asset quality.
A practical budget response for engineers
The Finance Act 2026 should trigger a review of engineering cost-estimation templates. Every serious project budget should now include a tax and compliance line that covers:
- VAT status of each major work package
- import duty, excise, IDF and RDL treatment for imported materials and equipment
- withholding tax exposure for transport, technical services, software and foreign suppliers
- eligibility for PPP or LPG infrastructure exemptions
- documentation required from exporters and suppliers
- tax-change risks during the contract period
- input VAT recovery or clawback risk
- tax treatment of scrap disposal
- compliance cost, advisory cost and audit-response cost
- cash-flow timing caused by tax payment, refund or withholding delays
The key engineering lesson is simple: a BOQ without tax intelligence is no longer a complete project budget.
Sector-by-sector impact summary
| Sector | Positive impact | Cost or risk pressure | Budget response |
| PPP infrastructure | VAT exemption for qualifying direct and exclusive services | Approval and documentation risk | Create tax eligibility schedules and approval trackers |
| LPG storage | VAT, IDF and RDL relief for qualifying large projects | KSh 5 billion threshold and CS recommendation required | Structure procurement packages around eligible infrastructure |
| Building construction | Potential local manufacturing boost | Higher excise on imported tiles, sanitary ware, MDF, plywood, timber and shower heads | Update BOQ rates and review imported finish specifications |
| Manufacturing | Relief for some excise paid on inputs used for exempt excisable goods | Imported input cost increases in selected categories | Review local sourcing and lifecycle quality |
| Energy | LPG infrastructure supported | Coal attracts 5% excise duty | Re-run energy feasibility models using lifecycle costing |
| ICT and automation | Digital infrastructure remains central to modern projects | Expanded royalty definition may increase WHT on software, licences and technical support | Review software contracts, gross-up clauses and tax classification |
| Project logistics | Clearer tax treatment of transport services | Withholding tax may affect transporter cash flow | Include WHT treatment in logistics contracts |
| Scrap and demolition | Formalisation of scrap value chain | WHT on scrap metal sales | Document scrap source, disposal, value and tax deduction |
| Real estate finance | REIT tax relief may support property investment | Compliance and structuring requirements | Improve technical due diligence and asset-quality reporting |
Conclusion: tax is now part of engineering risk management
The Finance Act 2026 rewards structured, well-documented and strategically important projects. PPP infrastructure, LPG storage, REIT-backed property investment and qualifying manufacturing activity receive support. At the same time, import-heavy construction, weak procurement documentation, poorly structured software contracts and informal material disposal face greater risk.
For Kenya’s engineering community, the Act should be read as a call to strengthen project budgeting. Engineers, quantity surveyors, project managers and procurement teams must work more closely with tax advisers, financiers and legal teams. The technical design may determine whether a project can be built, but the tax and budget structure increasingly determines whether it can be financed, procured and delivered without costly disputes.
The Finance Act 2026 therefore shifts the role of the engineer from designer and implementer to a more integrated project strategist. In the new environment, successful engineering will require not only sound technical design, but also disciplined cost modelling, compliant procurement, lifecycle thinking and a clear understanding of how fiscal policy affects infrastructure delivery.
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