IN SHORT: Kenya’s tax authority wants to abolish the VAT registration threshold entirely, forcing every business in the country into the 16% VAT system regardless of size. The proposal targets the Finance Bill for July 2026. It would pull 570,000 additional businesses into the VAT chain and is already politically sensitive after the 2024 Gen Z protests.
The Kenya Revenue Authority wants to abolish the VAT registration threshold entirely, requiring every business operating in Kenya, regardless of size or annual turnover, to register as a VAT agent and charge 16 percent on taxable sales. The proposal, contained in an internal KRA document seen by Business Daily, would repeal Section 34(1a) of the VAT Act, which currently exempts businesses below $39,000 (KES 5 million) in annual turnover from mandatory VAT registration. If adopted in the Finance Bill for the year starting July 2026, it would be the most sweeping change to Kenya’s consumption tax regime since 2007.
The scale of the change is significant. Kenya currently has 230,000 registered VAT taxpayers. KRA’s own projection is that the taxable base should be closer to 800,000. The agency has identified four interlocking failures behind the $2.9 billion (KES 378 billion) VAT gap: threshold exclusion limiting the taxbase, high VAT leakage through exemptions, weak visibility of the informal economy, and a narrow registered taxpayer base.
The practical impact on small traders is immediate and direct. A business currently selling KES 3 million in taxable goods annually would, for the first time, be required to add 16 percent VAT to customer invoices, maintain VAT-compliant records through the eTIMS electronic invoice system, file monthly VAT returns, and remit net VAT to the authority or face penalties.
KRA’s stated rationale is equity and revenue. The document frames zero threshold as a way to broaden equity in the tax system, arguing that a threshold creates an asymmetry where similarly situated businesses face different tax obligations. The revenue target is explicit: KRA wants to grow VAT collections from $5.1 billion (KES 653 billion) to over $7.8 billion (KES 1 trillion). KRA has recently invested $15.5 million in a new disaster recovery data centre at Konza Technopolis to harden its digital tax infrastructure. The government has not publicly endorsed the proposal.
Bigger Picture: Kenya collects VAT at a rate significantly below its African peers relative to GDP. KRA’s diagnosis is correct that the taxbase is narrow and the informal sector is mostly invisible to the consumption tax system. The question is whether zero-threshold mandatory registration is the right instrument. The political economy is hostile: the Gen Z protests of 2024 were explicitly about the cost of living, and a policy that adds 16 percent to the price of soft drinks at a corner shop hits exactly the constituency that took to the streets. The Treasury will decide in the Finance Bill whether the revenue case outweighs the political risk. That calculation has not gone well for Ruto’s government in recent years.
Source: Business Daily Africa
