Massive Informal Sector Formalization

NAIROBI, KENYA – An estimated two million Kenyan micro, small, and medium enterprises (MSMEs), largely from the informal Jua Kali sector, have been brought into the formal tax system, placing them directly on the radar of the Kenya Revenue Authority (KRA). This significant economic shift is a direct consequence of the government's flagship Affordable Housing Programme (AHP), which mandates tax compliance as a prerequisite for businesses seeking to supply goods and services to its numerous construction sites across the nation. The development was confirmed by MSME Development Principal Secretary Susan Mang'eni, who stated that 2.25 million MSMEs have been formalized through registration with the Micro and Small Enterprise Authority (MSEA).

The Tax Compliance Catalyst

The primary driver for this mass formalization is the government's policy to ring-fence billions of shillings in supply contracts for local enterprises. According to a report from the Ministry of Lands, Public Works, Housing, and Urban Development, at least KSh 11 billion was specifically allocated to Jua Kali artisans and MSMEs for the provision of essential construction components like doors, windows, and hinges. To access these lucrative contracts, businesses are required to obtain a Tax Compliance Certificate (TCC) from the KRA. A TCC is an official document that proves the holder has been filing their tax returns and paying any requisite taxes, effectively serving as a gateway to participating in formal government procurement. This requirement has created a powerful incentive for previously un-registered artisans and small businesses to formalize their operations by registering with the MSEA and, consequently, with the KRA.

KRA's Enhanced Monitoring and Digital Scrutiny

The influx of these newly registered taxpayers coincides with a broad and aggressive push by the KRA to enhance revenue collection through technology. The authority is increasingly leveraging digital tools to monitor compliance and curb tax evasion. A key component of this strategy is the electronic Tax Invoice Management System (eTIMS), which all businesses are now required to use for generating electronic tax invoices. This system provides the KRA with real-time visibility into business transactions, making it significantly harder for firms to under-declare income or evade VAT.

Furthermore, the KRA is integrating its iTax platform with other critical government financial systems, most notably the Integrated Financial Management Information System (IFMIS). This integration allows the tax authority to automatically cross-reference payments made to government suppliers against their tax records, flagging any discrepancies immediately. For the millions of MSMEs now supplying the Affordable Housing Programme, this means every payment received from a government contractor is visible to the KRA, ensuring a new level of tax scrutiny.

Implications for Kenya's Economy and MSMEs

This state-driven formalization presents both significant opportunities and considerable challenges for the Kenyan economy and the MSMEs involved. For the government, it represents a monumental expansion of the tax base, a key objective of the National Treasury's Medium-Term Revenue Strategy which aims to reverse the declining tax-to-GDP ratio. By bringing a substantial part of the informal economy—which accounts for an estimated 83% of the workforce—into the tax net, the government stands to increase domestic revenue mobilization for its development agenda.

For the MSMEs, formalization opens doors to previously inaccessible markets and financial services. With formal registration and a tax compliance history, these businesses are better positioned to secure loans from commercial banks, which have historically been hesitant to lend to informal entities due to perceived risk and lack of formal records. Participation in the AHP provides a stable revenue stream and the experience of fulfilling large-scale orders, which can enhance their capacity and competitiveness for future projects in both the public and private sectors.

However, the transition is not without its difficulties. Many MSMEs face significant challenges in navigating the complexities of the tax system, including the costs and administrative burden of maintaining accurate records, filing returns, and using digital platforms like eTIMS. There is a recognized need for increased support from tax authorities, not just as regulators, but as enablers of compliance through simplification of processes and taxpayer education. The long-term success of this initiative will depend on balancing enforcement with support, ensuring that the move into the formal economy fosters sustainable growth for these vital enterprises rather than stifling them with regulatory burdens.