The Treasury had proposed increasing the excise duty on mobile phones to 25 percent while moving the tax point from importation or factory release to the point at which a handset is activated on a mobile network.

The proposal was part of a plan to overhaul all taxes on imported phones.

However, MPs said shifting the tax point to activation would delay revenue collection from the point of importation to the point of sale and create confusion for consumers who could unknowingly purchase devices on which excise duty had not been paid.

The proposal had sparked concerns from telecom sector analysts, who flagged an ambiguity in the meaning of the ‘activation’ stage, on which taxes were payable on devices.

“The committee further observed that the proposal could undermine efficient tax administration and negatively affect the affordability and accessibility of mobile phones,” the finance committee’s report states.

It added that more research and stakeholder consultations were needed before such a policy could be implemented. The proposal had attracted opposition from phone dealers, the Kenya Private Sector Alliance, the Kenya Association of Manufacturers, the Kenya National Chamber of Commerce and Industry and several law firms and consultancies.

Stakeholders argued that the higher excise tax could undermine digital inclusion efforts, discourage local assembly and investment in the ICT sector, and increase the cost of accessing communication and digital services.

In a separate win for local smartphone assemblers, MPs also rejected a proposal to reclassify locally assembled mobile phones and lithium-ion batteries from zero-rated to VAT-exempt status. Zero-rated supplies attract no tax, allowing businesses to recover input VAT while exempt supplies do not allow input claims.

The committee recommended retaining the zero-rated status introduced under the Finance Act, 2023, saying it has helped lower production costs and support investment in local manufacturing.

“The Committee observed that these items were recently granted zero-rated status under the Finance Act, 2023 to support local manufacturing and reduce the cost of essential goods. Reversing this position would increase production costs, discourage investment, and undermine predictability in the tax system,” the report says.

The decision preserves access to VAT refunds claimed by local assemblers, including M-Kopa, Sun King and East African Device Assembly Kenya. The refunds have helped subsidise the cost of locally assembled smartphones targeting low-income consumers over the past three years.

The parliamentary recommendations come amid growing scrutiny of the government’s smartphone taxation policy after the National Treasury walked back plans to eliminate the 25 percent East African Community (EAC) customs duty on imported handsets.

The Treasury had initially proposed removing the customs duty alongside the 16 percent value-added tax, the 2.5 percent import declaration fee and the two percent railway development levy, while raising excise duty to 25 percent.

Had all the taxes been removed except the new excise duty, the total tax burden on imported smartphones would have fallen from about 55.5 percent to 25 percent, significantly reducing retail prices.

However, Treasury Cabinet Secretary John Mbadi last week confirmed that Kenya would instead seek a duty exemption on imported inputs used in the local assembly of smartphones while retaining the customs duty on finished devices.

Still, Kenya cannot unilaterally abolish the customs duty because it is set under the EAC common external tariff framework and would require approval from the regional bloc.

As a result, taxes on imported smartphones are now expected to fall only marginally to about 50 percent from the current 54.5 percent.

This is well above the 25 percent burden the government had initially projected, which leaves Kenyans exposed to high imported mobile phone prices.