Africa-Press – Kenya. The government plans to increase domestic revenue by targeting a two-percentage-point increase in the contribution of value-added tax (VAT) to gross domestic product (GDP).
The move will greatly change the country’s tax landscape and bring thousands of small businesses into the formal economy.
Only 250,000 businesses are VAT registered in the country, a figure the authority terms as insignificant.
The ambitious plan by the Kenya Revenue Authority (KRA) seeks to raise VAT-to-GDP from the current four per cent to six per cent, edging the country closer to regional peers such as Uganda, Rwanda, and Tanzania, where VAT-to-GDP averages about nine per cent.
KRA plans to overhaul the VAT framework, requiring all businesses—regardless of turnover—to remit VAT at the standard rate. Currently only firms with an annual turnover exceeding Sh5 million are mandated to register for VAT.
The proposed reform is anchored on widening the tax base by roping in micro, small, and medium-sized enterprises (MSMEs), many of which operate informally and outside the tax net despite contributing significantly to economic activity.
KRA argues that the existing threshold has concentrated the VAT burden on a relatively small pool of compliant businesses, while leaving out a vast segment of traders. By lowering the entry barrier, the taxman expects to distribute the obligation more evenly and reduce pressure on established firms.
In an interview, KRA Commissioner for Micro and Small Taxpayers, George Obell, defended the proposal, dismissing fears that it 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 its 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 necessarily increasing tax rates.
VAT remains one of the most important revenue streams for KRA, second only to income tax. In 2025, the authority collected an estimated Sh800 billion in total tax revenues, with VAT contributing over Sh300 billion—reflecting steady growth driven by improved compliance measures and digitisation.
Over the past three years, VAT collections have shown consistent upward momentum, rising from Sh250 billion in 2023 to Sh280 billion in 2024 and Sh300 billion last year.
This growth has been attributed to administrative reforms, enhanced enforcement, and the rollout of digital tools aimed at sealing revenue leakages.
Beyond revenue collection, KRA is pushing for the formalisation of businesses as a pathway to broader economic benefits.
According to Obell, bringing enterprises into the tax system fosters better business practices and long-term sustainability.
“It also raises the chances of credit access since financial institutions are more likely to lend to registered entities with verifiable income streams. Formal businesses maintain proper financial records, enabling better decision-making and access to financing.”
He added that only tax-compliant businesses can participate in public procurement opportunities and also boosts reputation among customers, suppliers and partners.
Since the establishment of the Micro and Small Taxpayers unit in 2024, Obell says KRA has made significant strides in on-boarding informal businesses.
The unit has facilitated the registration of at least 511,000 taxpayers since its inception, a milestone that underscores growing engagement with small enterprises. Obell, who was appointed to spearhead the unit in 2024 as part of KRA’s broader restructuring to focus on MSMEs, is now targeting an additional 320,000 registrations in the next phase.
The drive will leverage a mix of media campaigns and on-the-ground mobilisation, including partnerships with county governments, trade associations and business hubs.
“We are going to continue with vigorous registration exercises to ensure more businesses come on board,” Obell said.
Central to KRA’s strategy is the adoption of technology to simplify tax processes and reduce compliance costs. One of the flagship innovations is the Electronic Tax Invoice Management System (eTIMS), which enables real-time capture and transmission of transaction data to KRA systems.
Coupled with mobile-based tax solutions and integration with digital payment platforms, these innovations are gradually lowering the barriers to entry into the formal tax system.
While the proposal has been welcomed as a bold step towards fiscal sustainability, it is also likely to spark debate among small business owners wary of increased compliance obligations.
Analysts say the success of the reform will depend on how effectively KRA balances enforcement with incentives, ensuring that formalisation is seen not as a burden but as an opportunity.
