KRA Risks Shutting Down Informal Businesses with New Tax Plan

KRA (Kenya Revenue Authority) could run small traders out of town if its proposal to make it mandatory for all businesses dealing in taxable goods and services, register for Value Added Tax(VAT).

At present, only those businesses with annual revenues below KSh 5 million are exempt from VAT registration, meaning they have no VAT obligations.

Amendments to Section 34(1) (a) of the VAT Act will do away with the annual turnover requirement of KSh5 million used for VAT registration. This would require all businesses to register for VAT, charge it on their sales, and remit it to KRA on 20^th of each month.

KRA currently collects 16% Value Added Tax from imported items such as mobile phones, ceramics and glass products; luxury items such as high end electronics and jewellery; processed foods excluding basic staples such as maize, rice and bread; beverages including alcoholic drinks and sugary products; and services like accommodation, entertainment and professional services.

Items that are currently VAT exempt includes basic food items such as milk eggs, meat and vegetables; medicine and medical equipment including mosquito nets and sanitary towels, educational materials such as books and school supplies; agricultural inputs such as seeds, fertilizers and farming equipment and renewable energy equipment like solar panels and wind turbines.

According to leading financial analysts, VAT is complex and cash‑flow sensitive, which is why small enterprises were originally exempted. Previous government plans even considered raising the threshold to account for inflation, reflecting the intended balance between compliance and economic practicality.

Businesses with annual turnover under KSh 5 million are basically medium and small microenterprises.

Thus, forcing VAT obligations on such very small businesses risks destroying their economic viability. Many could rather shut down than comply, inadvertently increasing unemployment instead of boosting tax revenue.

Economists hold the view that the core challenge in tax collection is economic underperformance, not non‑compliance. There is a limit to how much tax revenue can be raised by simply increasing obligations in a struggling economy.

The most viable option for the taxman therefore is to let the economy grow first, then tax revenues will naturally follow.

In its strategy, KRA plans to remove the VAT threshold of KSh5.0 million to broaden equity, remove tax expenditures, and rationalize zero-rating while cushioning the vulnerable household.

KRA proposes to include payment service providers and aggregators for tax-at-source collection. This will enhance transaction traceability across the value chain,” reads a KRA document on the Medium-Term Revenue Strategy.

KRA and Treasury’s Medium Term Strategy

All businesses under the new model will need to register and will be required to charge the 16 percent VAT on the sales of goods and services not exempted from duty.

Kenyans say the proposal targets small businesses, increasing compliance costs and administrative burdens. It also contradicts the Medium-Term Revenue Strategy 2024/25–2026/27, which aimed to raise the threshold to simplify tax compliance.

Remittance of the VAT collection will be done every month to the Kenya Revenue Authority for small-scale traders.

Small Businesses VAT Registration

Businesses that generate less than 5 million Kenya shillings and have not been factoring in the consumption tax will now have to raise the cost of production to meet the VAT obligations.

A 16 percent VAT will be charged on all goods and services except for goods exempted from VAT, including food items such as maize flour and unprocessed green tea. Medical products such as syringes are also exempt from VAT.

Small business owners under the new model will be required to file and pay the VAT by the 20th of every month.

A record of the sales made will be required to support VAT returns and to notify the KRA of changes in the business.

Most small businesses are in the informal sector, which not fixed abode, street address with some dealing in seasonal items depending on what the market demands.

VAT Compliance for this makeshift, seasonal employment creators, will therefore be a poser for the tax man should the noose tighten on the neck of this business  segment, whose players including street vendors and kiosk owners, have no personal identification numbers(PINs) to begin with.

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