What Has Changed?
The Finance Act, 2026 moved two categories from zero-rated VAT to VAT-exempt status:
- Pharmaceutical manufacturing inputs.
- Bioethanol Vapour (BEV) stoves classified under HS Code 7321.12.00.
1. Pharmaceutical Manufacturing Inputs
Locally purchased or imported inputs and raw materials used in the manufacture of pharmaceutical products, upon recommendation by the Cabinet Secretary responsible for health, are now VAT exempt.
2. Bioethanol Vapour Stoves
BEV stoves classified under HS Code 7321.12.00 are now VAT exempt instead of zero-rated.
Why Does the Difference Matter?
Under zero-rating, a supplier charges 0% output VAT but can generally claim input VAT incurred in making the zero-rated supplies.
Under exemption, no output VAT is charged, but the supplier generally cannot recover input VAT attributable to the exempt supplies.
This means businesses dealing in these products may have irrecoverable input VAT, which becomes part of their cost.
Impact on Businesses
For pharmaceutical manufacturers: Input VAT on certain overheads, services and other costs may no longer be recoverable, potentially increasing the cost of manufacturing pharmaceutical products.
For BEV stove suppliers and manufacturers: VAT embedded in their input costs may increase the cost of supplying the stoves, potentially creating upward pressure on prices.
Consumers may continue to see no VAT charged on the final supply, but the tax may now be embedded further up the supply chain. The change also reduces VAT refund outflows for the Exchequer.
Key Takeaway
The move from zero-rated to exempt treatment changes the input VAT recovery position even though no VAT is charged to the consumer on the final supply.
Effective date: 1 July 2026.
Source: Finance Act, 2026 — VAT Act.
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