Tax Law Changes and Their Ripple Effects on Kenya’s Affordable Housing Sector

By Hamud Alwi Hamud, ACCA – Tax and Internal Auditor at Gulf Cap Real Estate

On 27th December 2024, the Tax Laws (Amendment) Act 2024 was assented into law, introducing significant changes across Kenya’s tax framework. Among the provisions that have drawn considerable attention and concern within the Affordable Housing sector is the removal of the 90-10 rule in the Value Added Tax (VAT) Act. While the amendment aimed at tightening VAT compliance and reducing leakage, its ripple effects have been profound—particularly for manufacturers, developers, and contractors engaged in affordable housing projects that anchor the government’s Bottom-Up Economic Transformation Agenda (BETA) and Kenya Vision 2030.

Understanding the 90-10 Rule and Its Role in the VAT System

Under the repealed 90-10 rule, manufacturers and suppliers making both taxable and exempt supplies were allowed to claim full input VAT on purchases if their taxable sales exceeded 90% of total sales within a tax period. This rule simplified compliance, reduced administrative costs, and provided much-needed liquidity to manufacturers serving multiple sectors—especially those supplying goods used in affordable housing projects.

Its removal means that manufacturers must now apportion input VAT between taxable and exempt supplies, denying full recovery of VAT where a portion of their sales relate to exempt supplies. Consequently, many manufacturers have been compelled to pass the irrecoverable VAT cost to their customers—in this case, developers and contractors of affordable housing units. The resulting increase in input costs has led to a wave of discontentment and concern across the construction and housing value chain.

Impact on Affordable Housing Developers and Contractors

The Affordable Housing Programme (AHP), one of the flagship components of BETA, aims to bridge Kenya’s housing deficit by providing decent and accessible homes for lower and middle-income earners. The removal of the 90-10 rule, however, introduces cost pressures that threaten the sector’s affordability objective.

1. Increased Construction Costs:

   
   

   Developers now face VAT charges on materials and intermediate goods that are exempt under the 90-10 rule. These costs are ultimately transferred to end buyers, undermining the affordability of housing units.

2. Reduced Profit Margins:

   
   

   The increased tax burden narrows already thin profit margins, discouraging private sector participation in affordable housing projects—yet the programme’s success hinges on robust private investment.

3. Strained Manufacturer–Developer Relationships:

   
   

   Manufacturers, caught between non-recoverable input VAT and market competition, have had no choice but to increase prices. This has created friction between them and developers who feel burdened by costs that were not envisaged during project planning and bidding.

The Policy Disconnect

While the intent of the amendment may have been to align VAT treatment with international norms and close compliance loopholes, it inadvertently conflicts with national policy priorities. The affordable housing agenda is not merely a social goal—it is a strategic economic pillar designed to catalyse job creation, stimulate demand for local materials, and foster inclusive urban development.

The removal of the 90-10 rule, therefore, contradicts the government’s commitment to reducing the cost of housing delivery. By inflating construction costs through higher VAT liabilities, the amendment undermines one of the key outcomes of the BETA framework: improving access to affordable housing while stimulating local industries.

Proposed Policy Reforms

As a key player in the affordable housing ecosystem, we propose the following tax policy interventions to restore balance and foster sector growth:

1. Reinstatement of the 90-10 Rule in the VAT Act:

   
   

   This will allow manufacturers to claim input VAT where over 90% of their supplies are taxable. It will restore cost efficiency, enhance liquidity, and strengthen collaboration between manufacturers and affordable housing developers.

2. Exemption of Services Used Exclusively in Affordable Housing Construction:

   
   

   Services such as engineering design, architectural work, project management, and site preparation should be exempted from VAT when used directly in affordable housing projects. This aligns with global best practices that recognize housing as a social good deserving fiscal incentives.

Why Tax Incentives Matter for Affordable Housing

Tax incentives are powerful levers for catalyzing growth in priority sectors. For the affordable housing agenda, their reinstatement would yield multifaceted benefits that extend beyond the housing industry.

Below are advantages of providing tax incentives to the affordable housing sector:

1. Job Creation:

   
   

   Lower construction costs enable developers to undertake more projects, leading to direct and indirect employment in construction, manufacturing, and related services.

2. Industrial Growth:

   
   

   Tax incentives boost demand for locally manufactured cement, steel, tiles, and other inputs, strengthening Kenya’s manufacturing base.

3. Increased Private Sector Participation:

   
   

   A favorable tax regime encourages investors to commit capital to affordable housing projects, expanding the pipeline of developments across counties.

4. Enhanced Housing Affordability:

   
   

   Reduced tax burdens translate into lower unit costs, bringing homeownership within reach for low- and middle-income earners.

5. Urban Renewal and Infrastructure Development:

   
   

   Affordable housing projects often catalyze infrastructure improvements—roads, water, power—benefiting surrounding communities.

6. Revenue Neutrality through Multiplier Effects:

   
   

   While tax incentives may reduce short-term revenue, the resulting economic activity expands the overall tax base, leading to higher collections in the medium term.

7. Improved Social Equity:

   
   

   Access to affordable housing addresses social inequality and promotes inclusive urban development.

8. Stimulation of Ancillary Industries:

   
   

   Real estate, transport, furniture, and financial services sectors experience growth as housing activity increases.

9. Encouragement of Innovation and Green Building:

   
   

   Incentives can be tied to sustainable construction practices, encouraging developers to adopt green technologies.

10. Fulfilment of National Development Goals:

    
    

    Tax incentives directly support Kenya Vision 2030 and the BETA framework, reinforcing government commitments to socioeconomic transformation.

A Call for Collaborative Policy Dialogue

The Affordable Housing Programme is not merely about building homes—it is about building lives, communities, and economic resilience. Tax policy should therefore be crafted not in isolation but in consultation with all stakeholders across the housing value chain. The Affordable Housing Board, Kenya Property Developers Association (KPDA), the Kenya Association of Manufacturers (KAM), and the National Treasury must work hand-in-hand to harmonize tax policies with housing and industrialization goals.

By reinstating the 90-10 rule and exempting services used exclusively in affordable housing, Kenya can unlock the full potential of public-private partnerships in housing delivery. These measures would not only reduce costs but also send a strong signal of policy coherence and investor confidence—both essential ingredients for sustainable economic growth.

Conclusion

The spirit of the 90-10 rule was never about leniency—it was about enabling productivity and competitiveness. Its removal, though well-intentioned, has inadvertently strained one of the most strategic sectors of the Kenyan economy. As developers, manufacturers, and contractors navigate these challenges, it is imperative that policymakers revisit this decision with a broader lens—one that prioritizes affordability, inclusivity, and long-term economic stability.

The Affordable Housing Programme remains a cornerstone of Kenya’s economic and social transformation. With the right tax incentives, it can continue to provide not just homes, but hope and opportunity for millions of Kenyans.

About the Author

Hamud Alwi Hamud, ACCATax and Internal Auditor | Policy Advisor | Affordable Housing AdvocateHamud is a tax practitioner with over eight years of experience in tax advisory, financial analysis, and policy formulation. He has worked with leading organizations including RSM (Eastern Africa), and Gulfcap Real Estate Limited. He is passionate about leveraging fiscal policy to drive sustainable housing and economic transformation.

📧 Hamudalwi91@gmail.com | 📞 +254 736 838 080 | LinkedIn: Hamud Alwi