What the data shows
What does the future hold for value added tax (VAT) in Kenya? Recent proposals from the Kenya Revenue Authority (KRA) suggest significant changes that could impact businesses across the country. The KRA aims to eliminate the current VAT registration threshold of KSh 5 million in annual turnover, a move that could require all businesses to remit VAT at the standard rate and issue compliant tax invoices.
Kenya’s VAT collections have posted steady growth over the past four financial years, rising from Sh244.93 billion in 2021/22 to an estimated Sh327.66 billion in 2024/25 for locally generated taxes. VAT on imports has also seen an increase, climbing from Sh278.17 billion to Sh333.07 billion over the same period. Currently, VAT is the second-largest revenue source for the government, contributing Sh660.7 billion to the exchequer.
The KRA estimates that the current VAT system captures only a fraction of potential taxpayers, with about 230,000 registered VAT entities. The removal of the registration threshold could potentially increase VAT collections from roughly KSh 653 billion to over KSh 1 trillion. However, this proposal has raised concerns among stakeholders, particularly regarding its impact on micro-enterprises.
Approximately 83 percent of Kenya’s total employment is accounted for by the informal sector, which often lacks the administrative capacity to comply with such tax regulations. Critics argue that the proposal may impose a heavy operational burden on micro-enterprises, which could struggle to meet the new requirements. Jane Wanjiru, a small business owner, expressed her concerns, stating, “The proposal feels like an existential threat.”
Moreover, the cost of hiring accounting staff or investing in compliant software often exceeds the actual tax revenue the KRA would collect from a micro-enterprise. This raises questions about the feasibility of compliance for smaller businesses. Research from the OECD warns against lowering registration thresholds, citing potential inefficiencies in monitoring small taxpayers.
There are fears that the KRA’s proposal could push informal businesses further into the shadows, with many opting for cash transactions to avoid compliance altogether. This could undermine the very goal of increasing tax revenues and formalizing the economy. As one expert noted, “If the KRA intends to widen the net, it must provide the infrastructure, training, and streamlined digital tools that make compliance feasible for the smallest trader.”
Kenya’s VAT collections have shown growth due to increased economic activity and improved tax compliance, but the proposed changes could alter the landscape significantly. As discussions continue, the implications of these proposals remain to be seen, and details remain unconfirmed.
