KRA Proposes Sweeping VAT Changes to Bring Small Businesses into Tax Net

The Kenya Revenue Authority (KRA) has unveiled a proposal to overhaul the country’s Value Added Tax (VAT) system by requiring all businesses, regardless of size, to register, charge, and remit VAT, a move that could significantly reshape Kenya’s informal and small business sectors.

Under the proposed amendments to Section 34(1)(a) of the VAT Act, the current annual turnover threshold of KSh 5 million for mandatory VAT registration would be scrapped entirely. This would effectively bring micro, small, and medium enterprises (MSMEs) into the formal tax net for the first time.

If implemented, all businesses would be required to charge the standard 16 percent VAT on taxable goods and services, maintain detailed transaction records, and file monthly VAT returns by the 20th of each month.

The proposal forms part of KRA’s broader Medium-Term Revenue Strategy aimed at expanding the tax base and improving revenue collection. Currently, only about 230,000 businesses are registered for VAT, but the authority hopes to increase that number to approximately 800,000 under the new system.

KRA argues that the reform is necessary to address a significant VAT collection gap and boost revenues from the current KSh 653 billion to over KSh 1 trillion.

“This measure is designed to broaden equity, enhance compliance, and improve traceability across the value chain,” the authority noted in its policy documents.

However, the proposal has sparked concern among small business owners and economic analysts, who warn that the policy could increase operational costs and place additional administrative burdens on enterprises that are already operating on thin margins.

For many small traders, particularly those earning below KSh 5 million annually, the shift would mean incorporating VAT into pricing structures for the first time. This could lead to higher prices for everyday goods and services, including consumer items such as soft drinks, cosmetics, and cooking gas.

Critics argue that the additional compliance requirements, such as maintaining detailed sales records, issuing electronic tax invoices, and filing monthly returns, may overwhelm small businesses lacking the resources or expertise to meet these obligations.

The reform also mandates the use of the Electronic Tax Invoice Management System (eTIMS), which requires businesses to issue digital invoices linked directly to KRA systems. While about 41 percent of targeted non-VAT registered taxpayers have already onboarded the system, a significant number of small enterprises remain outside the digital tax framework.

Economists describe the proposal as a policy trade-off between increased government revenue and the potential strain on Kenya’s informal sector, which accounts for a large share of employment.

“There is a real risk that some small businesses may either pass the cost onto consumers or struggle to survive under the new compliance regime,” noted one analyst familiar with the policy discussions.

The proposal also appears to contradict earlier policy directions outlined in recent finance bills, which had suggested raising the VAT threshold to ease compliance for small firms. Instead, the new plan takes the opposite approach by eliminating the threshold entirely.

Despite the concerns, KRA maintains that the reform will improve fairness in taxation by ensuring that all businesses contribute to national revenue, rather than placing the burden on a limited number of registered taxpayers.

The proposed changes are still subject to legislative approval and are expected to feature prominently in upcoming fiscal policy debates, including discussions around the next Finance Bill.

As the government weighs its options, the final outcome will likely determine how Kenya balances the need for increased revenue with the sustainability of its small business sector, one of the country’s key economic drivers.

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