Mounting Tensions Over Tax Systems

NAIROBI – A deepening rift is emerging between the Kenya Revenue Authority (KRA) and the nation's business community over the implementation of new digital tax systems. While the government champions technology as the key to sealing revenue loopholes and expanding the tax base, many entrepreneurs and corporate leaders are raising alarms about significant operational disruptions, increased compliance costs, and what they term as punitive enforcement measures.

At the heart of the dispute is the electronic Tax Invoice Management System (eTIMS), which requires all businesses to generate and transmit invoices to the KRA in real-time. The system is a cornerstone of the government's strategy to enhance VAT collection and minimize fraud. However, its rollout has been fraught with challenges. Business groups, including the Kenya Association of Manufacturers (KAM) and the Kenya Private Sector Alliance (KEPSA), have repeatedly called for a more predictable and supportive tax regime, warning that the current environment is becoming hostile to business growth.

The eTIMS Implementation Challenge

Despite KRA's intentions, the transition to eTIMS has been turbulent. As of June 2024, data showed that over 80% of eligible businesses had not yet registered on the platform, citing technical complexity, poor internet connectivity in rural areas, and a general lack of understanding of the system's requirements. Small and medium-sized enterprises (SMEs) have been disproportionately affected. Many small-scale suppliers, particularly in the agricultural sector, are not eTIMS-compliant, forcing larger companies to either halt business with them or risk having legitimate expenses disallowed.

Starting January 1, 2026, the KRA will automatically disallow any business expense not supported by a valid eTIMS invoice. This policy means businesses could pay taxes on money already spent, severely impacting cash flow and potentially rendering some SMEs unprofitable. KAM has warned that such policies, combined with high taxes and power costs, have already led to over 300 company closures in early 2025, with more expected to follow.

A High-Stakes Revenue Drive

The KRA's aggressive digital push is driven by immense pressure from the National Treasury to meet ever-increasing revenue targets to fund the national budget and manage public debt. For the 2024/2025 fiscal year, KRA surpassed its target, collecting KSh 2.571 trillion against a goal of KSh 2.555 trillion. The target for the 2025/2026 fiscal year is set even higher at KSh 2.75 trillion. This pressure is compounded by the fact that the Finance Act 2025 aims to raise an additional KSh 70 billion primarily through enhanced compliance and enforcement rather than new taxes, a strategic shift following public backlash against the 2024 Finance Bill proposals.

President William Ruto has publicly supported the KRA's efforts, emphasizing a zero-tolerance stance on tax evasion and lauding the use of technology to enhance collection. The government plans to further integrate AI and algorithms to automate tax assessment and collection within the next two years, a move economic advisor Dr. David Ndii says will fundamentally change tax administration.

Calls for Collaboration and Reform

In response to the growing friction, both KRA and business lobbies have initiated dialogues. KEPSA and KRA have held high-level meetings to co-create solutions, formalize working groups to address sector-specific issues, and simplify the tax regime. KRA has acknowledged the challenges, particularly for small businesses, and has introduced simplified access points like a USSD service (*222#) and a WhatsApp chatbot to aid compliance.

However, frustrations persist. Taxpayers frequently report technical glitches with the iTax portal, especially near filing deadlines, which has forced KRA to grant extensions and waive penalties. Furthermore, issues like delays in VAT refunds, though improving, continue to strain business liquidity. A recent Treasury decision to block the offsetting of tax dues with verified refunds has further frustrated businesses who were counting on the provision in the Finance Act 2025 to ease cash flow.

As Kenya moves towards a fully digitized tax system, the central challenge remains balancing revenue maximization with fostering a conducive environment for business. Stakeholders agree that without a stable, predictable, and supportive policy framework, the government's ambitious economic growth targets, which rely heavily on a thriving private sector, could be jeopardized.