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. Removing the threshold is the most direct response to the first of those failures. Every business currently operating below the $39,000 line, including shops, wines and spirits outlets, mobile phone retailers, soft drink sellers, cosmetics stalls, and petroleum product vendors, would be required to register, issue VAT-compliant invoices, charge the tax on applicable sales, and remit collections to KRA monthly.
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. For businesses selling products not currently carrying VAT at the retail level, the removal of the threshold means a structural price increase unless they absorb the tax themselves.
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 depending on their registered turnover. 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). The additional $2.7 billion would come primarily from pulling the informal and micro-business sector into the formal VAT chain.
The proposal sits within a broader KRA revenue mobilisation agenda that has accelerated in 2026. KRA has recently invested $15.5 million (KES 2 billion) in a new disaster recovery data centre at Konza Technopolis to harden its digital tax infrastructure, and the agency has been deploying body cameras for customs and enforcement staff to deter corruption. The eTIMS electronic invoicing rollout now covers all sectors, creating the digital infrastructure through which a zero-threshold VAT regime could theoretically be administered. The push also accompanies KRA’s ambition to expand active taxpayers from 7 million to 11.5 million by June 2027.
There is a political dimension that KRA’s document cannot obscure. Kenya’s Treasury has been deliberately cautious about significant new taxes since the June 2024 Gen Z protests that forced President Ruto to withdraw the Finance Bill 2024 in the face of popular revolt over proposed levies. A zero VAT threshold effectively raises prices across the informal retail sector, which is where most Kenyan households buy daily goods. The government has not publicly endorsed the proposal, and it remains a KRA recommendation rather than a confirmed policy. However, it is scheduled to influence the shape of the Finance Bill 2026, which means parliamentary and public scrutiny is coming.
The alternative lens on the same data is that Kenya’s VAT compliance problem is not primarily a threshold problem. The 230,000 registered businesses already in the system generated only $5.1 billion against a theoretical base that should produce $7.8 billion. The gap is leakage, exemptions, and compliance failures within the existing registered base, not just the exclusion of small businesses. Pulling 570,000 additional micro-businesses into mandatory VAT registration without simultaneously addressing invoice fraud, the missing trader scheme, and the input VAT refund backlog risks adding administrative burden without proportionate revenue gain.
Bigger Picture: Kenya collects VAT at a rate significantly below its African peers relative to GDP. South Africa, the regional benchmark, collects far more. 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. eTIMS is a necessary precondition for it to work at scale, and that infrastructure is now largely in place. But 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
