The Kenya Revenue Authority (KRA) has defended its proposal to expand value-added tax (VAT) coverage, insisting that the reform will not harm small businesses but instead ease the burden on a few compliant firms while boosting domestic revenue.
The plan, which seeks to raise VAT’s contribution to gross domestic product (GDP) by two percentage points, is expected to transform the country’s tax landscape and bring thousands of informal enterprises into the formal economy.
Currently, only 250,000 businesses are VAT registered, a figure KRA considers insignificant given the scale of economic activity. The authority aims to lift VAT-to-GDP from the present four per cent to six per cent, narrowing the gap with regional peers such as Uganda, Rwanda, and Tanzania, where VAT averages about nine per cent of GDP.
Under the proposed changes, all businesses will be required to remit VAT at the standard rate, regardless of turnover. At present, only firms with annual turnover above Sh5 million are mandated to register. KRA argues that the existing threshold has concentrated the VAT burden on a small pool of compliant businesses while leaving out a vast segment of traders. By lowering the entry barrier, the taxman expects to distribute obligations more evenly and reduce pressure on established firms.
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KRA Commissioner for Micro and Small Taxpayers, George Obell, dismissed fears that the reform could stifle small enterprises. “This proposal is not going to hurt businesses in any way. Businesses only remit VAT paid by consumers. The move will ease the burden on a few VAT-registered businesses and generate more domestic revenue for the country,” he said.
Kenya’s VAT performance has historically lagged behind regional peers due to exemptions, compliance gaps, and the large informal sector. Aligning the system with East African standards could significantly enhance revenue mobilisation without raising tax rates. VAT remains one of KRA’s most important revenue streams after income tax. In 2025, the authority collected an estimated Sh800 billion in total tax revenues, with VAT contributing over Sh300 billion. Collections have risen steadily, from Sh250 billion in 2023 to Sh280 billion in 2024 and Sh300 billion last year, driven by reforms, enforcement, and digitisation.
Beyond revenue, KRA is pushing for the formalisation of businesses as a pathway to broader economic benefits. Obell noted that tax compliance fosters better business practices and sustainability. Registered enterprises are more likely to access credit, participate in public procurement, and build stronger reputations with customers and suppliers. Since the establishment of the Micro and Small Taxpayers unit in 2024, KRA has registered at least 511,000 taxpayers, with plans to onboard an additional 320,000 in the next phase through media campaigns, county partnerships, and trade associations.
Technology is central to the strategy. The Electronic Tax Invoice Management System (eTIMS) enables real-time capture and transmission of transaction data, while mobile-based solutions and integration with digital payment platforms are lowering compliance costs. These innovations are gradually reducing barriers to entry into the tax system.
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While the proposal has been welcomed as a bold step towards fiscal sustainability, it is expected to spark debate among small business owners wary of increased compliance obligations. Analysts caution that success will depend on how effectively KRA balances enforcement with incentives, ensuring that formalisation is seen as an opportunity rather than a burden.
The proposed reforms could unlock new revenue streams, strengthen fiscal stability, and transform the relationship between small businesses and the tax system.
By Masaki Enock
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