By A document seen by Business Daily reveals that the Kenya Revenue Authority has proposed scrapping the Ksh 5 million annual turnover threshold that currently determines who must register for VAT. If the proposal makes it into the Finance Bill for the year starting July 2026, every business in Kenya ( from a multinational corporation to a chips shop in Githurai, a freelance consultant, a roadside mechanic, or a kiosk owner in Kisumu ) would be required to register for VAT, charge 16% on applicable sales, file monthly returns, and remit collections to KRA by the 20th of every month.
KRA argues the move will help Kenya increase VAT revenues from the current Ksh 653 billion to over Ksh 1 trillion, closing an estimated 38% VAT collections gap that the authority attributes to threshold exclusion, high VAT leakage through exemptions, weak visibility of the informal economy, and a narrow tax base of just 230,000 registered VAT taxpayers.
The revenue case is mathematically plausible. The implementation case is far more complicated. And the impact on small businesses ( which are already struggling to integrate eTIMS, already navigating a more aggressive enforcement environment than any year in recent memory, and already operating on margins that leave almost no room for additional compliance costs ) deserves a much more honest examination than KRA's proposal document provides.
First: What VAT Actually Is and How It Works
VAT is widely misunderstood as a business tax. It is not. It is a consumption tax ( paid ultimately by the end consumer) that businesses collect on behalf of KRA and remit monthly. Understanding this distinction is essential to understanding why removing the threshold affects businesses so profoundly even though they are not the ones bearing the final tax burden.
Here is how the system works in practice.
When you buy a phone case for Ksh 500 from a VAT-registered shop, the shop charges you Ksh 580, the Ksh 500 price plus 16% VAT of Ksh 80. The Ksh 80 is not the shop's money. It is KRA's money, collected temporarily by the shop and remitted at month-end.
But the shop also paid VAT when it bought that phone case from its supplier. If it paid Ksh 300 plus Ksh 48 VAT to the supplier, it has already handed Ksh 48 to KRA through that transaction.
At month-end, the shop does not remit Ksh 80 to KRA. It remits the difference:
Output VAT (collected from customers): Ksh 80
Input VAT (paid to suppliers): Ksh 48
VAT payable to KRA: Ksh 32
This input/output mechanism is what makes VAT a consumption tax rather than a business tax, each player in the supply chain only remits the VAT they added at their stage, not the full amount collected. The final consumer, who cannot claim input VAT back, bears the entire 16%.
This also means that a VAT-registered business that buys heavily from other VAT-registered suppliers can sometimes have more input VAT than output VAT, in which case KRA owes them a refund. This is common for exporters and zero-rated suppliers, and it is one of the genuine benefits of VAT registration for businesses that purchase significant inputs.
How VAT Businesses Operate Differently
Being VAT-registered changes how a business operates in ways that go well beyond adding 16% to invoices.
Monthly filing is mandatory — no exceptions. A VAT return must be filed by the 20th of every month, even if the business made zero taxable sales that month. A nil return still needs to be filed. Missing a monthly filing triggers an automatic penalty of Ksh 10,000 or 5% of the tax due, whichever is higher. There are twelve filing deadlines per year instead of the single annual income tax return most small businesses currently manage.
Record-keeping standards are higher. Every sale and purchase must be documented with compliant tax invoices. Since January 2026, compliant means eTIMS-issued. Every invoice must show the VAT amount separately. Records must be kept for five years in English or Kiswahili.
Cash flow changes permanently. A VAT-registered business collects money that does not belong to it and must hold it until the 20th of the following month. If a customer pays late or defaults, the business may still owe KRA the VAT it was supposed to collect. The cash flow management this requires is significantly more complex than what a non-VAT business manages.
Pricing changes competitively. A VAT-registered business selling to non-VAT consumers must either absorb the 16% to stay price-competitive, or pass it on and risk losing customers to non-registered competitors. This competitive distortion ( where registered businesses appear more expensive than unregistered ones selling the same product ) is one of the core arguments against a zero threshold.
eTIMS compliance is non-negotiable. Every VAT-registered business must be on eTIMS and must issue electronic invoices for every taxable transaction. This is not a recommendation, it is a legal requirement with penalties for non-compliance.
The eTIMS Problem That the Proposal Ignores
This is where KRA's proposal runs into its most serious practical obstacle and where the gap between the revenue projection and implementation reality is widest.
Kenya currently has approximately 230,000 VAT-registered taxpayers out of an estimated business population of several million. Getting those 230,000 businesses onto eTIMS has been a multi-year exercise that is still incomplete. Compliance rates vary dramatically by sector and business size. The eTIMS integration challenges that large retailers and formal businesses face are manageable, they have IT departments, accounting software, and dedicated compliance staff.
The challenges facing a sole proprietor running a hardware shop in Nakuru, a food vendor at a market in Kisii, or a freelance graphic designer working from a laptop in Eldoret are categorically different. For these businesses:
eTIMS requires a device capable of running the software and a reliable internet connection to transmit invoices. Many small traders have smartphones but not the consistent data connectivity that eTIMS transmission requires.
The onboarding process ( registering, configuring devices, understanding what constitutes a compliant invoice ) requires either personal technical knowledge or the cost of hiring someone who has it.
Every transaction at a market stall, every roadside sale, every small service rendered needs a digital invoice. For a business completing 50 small transactions a day, this is an operational transformation, not a minor adjustment.
KRA's own document acknowledges that key challenges in closing the VAT gap include "weak visibility of the informal economy" and a "narrow tax base with just 230,000 VAT taxpayers registered." What it does not acknowledge is that the reason most of those businesses are not registered is not evasion, it is that the compliance system was not designed for them.
Removing the threshold does not solve the eTIMS integration problem. It multiplies it by an order of magnitude. Before the proposal can be taken seriously, KRA needs to answer how millions of micro-businesses will be brought onto eTIMS, what the onboarding support looks like, what the device requirements are, what happens in areas with poor connectivity, and what the transition timeline is. None of these questions are addressed in the proposal document.
The Direct Contradiction With the Medium-Term Revenue Strategy
The proposal is not just ambitious, it directly contradicts Kenya's own stated tax policy direction from two years ago.
The Medium-Term Revenue Strategy 2024/25 – 2026/27 proposed to increase the VAT registration threshold in a bid to make tax compliance easier for small businesses. The strategy acknowledged that the current Ksh 5 million threshold ( which has not been adjusted since 2007 despite nearly two decades of inflation) was already catching businesses that, in real terms, are smaller than the threshold was designed to cover. Inflation alone means that Ksh 5 million in 2026 buys considerably less than Ksh 5 million in 2007. In real terms, the threshold has already been declining for nineteen years.
The Medium-Term Revenue Strategy's direction was therefore: raise the threshold, reduce the compliance burden on genuinely small businesses, and focus enforcement resources on the segments of the economy large enough to bear the administrative weight of VAT registration.
KRA's new proposal goes in the exact opposite direction, eliminating the threshold entirely. This is not a refinement of policy. It is a reversal of it. And it raises a legitimate question about coherence: if the official medium-term strategy says one thing and the authority responsible for implementing it proposes the opposite, which direction does Kenya's tax policy actually intend to go?
What Happens to Small Businesses if This Passes
The most immediate impact is on pricing. Small traders dealing in products such as the sale of mobile phones, soft drinks, bottled water, cosmetics, snacks, cooking gas and petroleum products would be required to charge VAT and remit the collections to KRA every month. These are not luxury goods, they are items that define the cost of living for ordinary Kenyans at the lower end of the income scale.
A mama mboga who currently sells vegetables without VAT would, under this proposal, need to determine which of her products are VAT-exempt and which are not. Fresh vegetables are exempt. Processed foods are not. She would need to track two categories of sales, issue compliant invoices for taxable items, file monthly returns, and remit to KRA, for a business that may generate Ksh 50,000 in monthly revenue at most.
The compliance cost of doing this correctly (in time, in accounting support, in data costs for eTIMS ) may well exceed the tax she would collect and remit. This is not a hypothetical. It is the documented experience of VAT expansion in other developing economies that removed thresholds without adequate support infrastructure.
The penalty structure makes the risk asymmetric. A small business that tries to comply but makes mistakes ( misclassifies a product, files a day late, issues a non-compliant invoice ) faces penalties that can wipe out thin margins. A business that ignores the requirement entirely faces KRA enforcement, but only if KRA finds it, which in a country where the authority already struggles to track 230,000 registered taxpayers, is not guaranteed.
The rational response for many small businesses, faced with compliance costs they cannot absorb and penalties they cannot afford, is to go deeper into informality rather than surface into the formal economy. That is the failure mode KRA needs to model before tabling this proposal as a revenue solution.
Is There a Middle Ground?
The goal of broadening the VAT base is legitimate. Kenya's 230,000 VAT-registered taxpayers is a genuinely narrow base for an economy of Kenya's size and complexity. The Ksh 378 billion VAT gap is real and represents significant foregone revenue that constrains what the government can spend on infrastructure, healthcare, and education.
But the instrument matters as much as the goal. There are approaches that could expand the VAT base without imposing the full compliance burden of VAT registration on micro-businesses.
A tiered system that introduces a simplified VAT mechanism for businesses between Ksh 1 million and Ksh 5 million in turnover ( perhaps through M-Pesa transaction data and a flat remittance rate rather than full input/output accounting ) would capture revenue from the lower business segment without requiring full VAT registration infrastructure. Countries including Rwanda and Tanzania have experimented with simplified VAT schemes for small businesses with measurable success.
Raising the threshold to reflect inflation rather than lowering it to zero would also generate more revenue than it might appear, many businesses currently operating below Ksh 5 million in nominal terms are above the 2007 equivalent value, meaning a threshold adjusted for inflation would actually bring in more taxpayers, not fewer, compared to the current situation.
Fixing the eTIMS integration problem for the 230,000 already registered businesses ( improving connectivity support, simplifying the onboarding process, reducing penalties for good-faith compliance errors ) would generate more revenue from the existing base before expanding it.
None of these approaches generate the headline figure of Ksh 1 trillion that KRA's zero-threshold proposal projects. But they are approaches that could actually be implemented without fracturing the small business sector that employs the majority of working Kenyans.
The Honest Bottom Line
KRA needs revenue. Kenya's fiscal position, as detailed in our earlier reporting on the Ksh 245 billion monthly collection target, makes that need urgent and real. The instinct to broaden the tax base rather than raise rates on an already-strained formal sector is correct in principle.
But removing the VAT threshold entirely in a year when small businesses are still struggling to integrate eTIMS, when the Medium-Term Revenue Strategy explicitly pointed in the opposite direction, and when compliance infrastructure for micro-businesses does not yet exist, is a revenue projection dressed up as a policy proposal.
The Ksh 1 trillion figure assumes that the millions of businesses below the current threshold will comply with VAT registration, eTIMS integration, monthly filing, and accurate input/output accounting. There is no evidence base for that assumption. The more likely outcome is a two-tier result: formal businesses comply and absorb significant new costs, while the informal economy (which KRA already acknowledges it has weak visibility of) does not change its behaviour at all, because the enforcement tools to reach it do not exist.
The proposal is still at the document stage. Public participation on the Finance Bill, when it is tabled, is the window to push back. Small business associations, tax practitioners, and the business community should be preparing substantive submissions now, before July, when what is currently a KRA working document becomes a Finance Bill clause.
This article is part of TechInKenya's ongoing coverage of Kenya's 2026 tax enforcement environment. Read our related pieces on the KRA automated validation system, the VAT Special Table removal, and why KRA is being so aggressive this year.
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