The Finance Act 2025 Kenya, assented into law on 27th June 2025, introduces wide-ranging amendments across the tax spectrum, including Income Tax, Value Added Tax (VAT), Excise Duty, and Tax Procedures.
While Non-Governmental Organizations (NGOs) are traditionally non-profit and often benefit from tax exemptions, the reality is that this new law directly influences how NGOs operate, spend, report, and comply.
At MGK Consulting, we have broken down the key provisions of the Finance Act 2025 and analyzed their implications for NGO boards, CEOs, program directors, and finance managers. In addition, we explore other emerging compliance issues that, though not introduced by the Act, are increasingly critical to effective NGO governance in Kenya.
1. Finance Act 2025: Key Changes Affecting NGOs
Payroll and Staff-Related Taxes
Section 37 now requires employers to apply all relevant tax reliefs, exemptions, and deductions when computing employee taxable income. This includes:
- Pension contributions
- Affordable Housing Levy
- Social Health Authority (SHA) contributions
- Mortgage repayments
- Disability-related exemptions (first KES 150,000 tax-free income)
What This Means for NGOs:
- Payroll systems must be regularly updated to apply correct deductions and exemptions.
- Employees must submit supporting documentation (e.g., pension contribution certificates, mortgage interest certificates, KRA disability exemption certificates).
- Failure to capture this may lead to overpayment of taxes, which are not easily refundable.
Recommended Actions:
- Train HR and Finance teams on the new payroll tax rules.
- Sensitize employees to provide required documentation early.
2. Increase in Allowable Per-Diem
The allowable daily per-diem has been increased from KES 2,000 to KES 10,000 for subsistence, travel, entertainment, and other duty-related allowances.
Implication for NGOs:
- Payroll and reimbursement systems must reflect the new statutory threshold.
- Any per-diem above KES 10,000 must be supported by receipts or will be taxable.
Recommended Actions:
- Update payroll systems with new thresholds.
- Train HR and Finance teams on proper per-diem processing.
- Communicate new rules clearly to employees.
3. VAT Clawback on Exempt and Zero-Rated Goods
A new VAT provision requires tax payment where exempted or zero-rated goods are later used for purposes inconsistent with the exemption granted.
Implication for NGOs:
- Goods/services acquired under exemption must be used strictly for their approved program purposes.
- Misuse may trigger unexpected VAT liabilities, straining donor-funded budgets.
- Recommended Actions:
- Conduct an inventory audit linking exempt items to project budgets.
- Train procurement and finance staff on exemption compliance.
- Engage donors early to renegotiate VAT-inclusive budgets.
- Implement internal controls to track usage of exempted goods.
Other Emerging Issues for NGOs in Kenya
1. Grant Agreements, Contracts, and Compliance Risk
The Kenya Revenue Authority (KRA) has adopted a more aggressive stance in reviewing NGO operations. Risks include:
- Back taxes for payroll or income not covered by valid exemptions.
- Project implementation delays as funds are diverted to pay taxes.
- Donor confidence erosion due to non-compliance.
Recommended Actions:
- Review grant agreements and MoUs with tax implications in mind.
- Involve tax and legal advisors in project structuring.
- Update finance and operations manuals to align with KRA compliance expectations.
2. Taxation of Income from Non-Core Activities
Income from non-core or commercial activities (training, consultancy, rentals, or social enterprise ventures) is taxable by default unless covered by a valid exemption certificate.
What NGOs Must Do:
- Ring-fence non-core income separately from donor-funded income.
- Apply for a specific KRA exemption where applicable.
- Consider setting up a Special Purpose Vehicle (SPV) for large-scale commercial operations.
- Seek advance tax rulings to clarify treatment and reduce disputes.
3. Public Benefit Organizations (PBOs) – Legal Updates
Extension of transition deadline: Gazette Notice No. 6255 (16 May 2025) extended the transition deadline under the PBO Act to 13th May 2026.
High Court ruling (June 2025): Declared that NGOs registered under the repealed NGO Coordination Act are automatically recognized as PBOs. Mandatory re-registration and forced membership in the PBO Federation were declared unconstitutional.
Implications:
- Legal continuity for NGOs is safeguarded.
- Compliance requirements under the PBO Act remain, though implementation guidance from the Ministry of Interior is pending.
- Our Final Thought: NGOs Must Be Proactive
- Although NGOs are not the primary target of the Finance Act 2025 Kenya, the ripple effects are clear. Donors, auditors, and regulators will expect higher accountability for how funds interact with tax laws.
Now is the time to:
- Reassess your operating model
- Tighten governance and compliance structures
- Partner with professional advisors for ongoing guidance
How MGK Consulting Can Help NGOs
At MGK Consulting, we support NGOs in Kenya through:
- Tax compliance and exemption reviews
- NGO tax health checks
- Financial systems and internal control reviews
- Staff training on donor-aligned tax and compliance requirements
- Odoo ERP implementation for project management, payroll, procurement, accounting, and donor reporting
Contact us at enquiries@mgkconsult.co.ke or visit www.mgkconsult.co.ke to book a consultation.
Disclaimer
This article is for general informational purposes only and does not constitute legal, tax, or regulatory advice. For tailored guidance, please consult your legal counsel or contact MGK Consulting directly.