In a bustling stall in Nairobi’s Gikomba market, John Njenga spends his afternoons balancing ledgers for a hardware business that turns over roughly KES 3 million a year. For John, the ledger is a survival tool. But if recent proposals from the Kenya Revenue Authority (KRA) become law, that ledger will cease to be a record of his livelihood and become a mandatory instrument of state tax collection.

The Kenya Revenue Authority is pushing to eliminate the current KES 5 million annual turnover threshold for Value Added Tax (VAT) registration. This proposal, part of a broader fiscal strategy to widen the tax base, seeks to bring every micro, small, and medium-sized enterprise (MSME) into the VAT net. As the government grapples with an estimated 38 percent VAT collection gap, the move signals a seismic shift: the state is no longer content to tax only the visible, corporate sector it is now aggressively pursuing the vast, informal economic ecosystem that accounts for the majority of Kenya’s workforce.

The Case for Radical Formalization

At the heart of the KRA’s argument is the principle of fiscal equity. George Obell, the KRA Commissioner for Micro and Small Taxpayers, has defended the proposal as a necessary step to distribute the tax burden more evenly. The authority contends that the current system, which exempts businesses earning below KES 5 million, leaves a massive portion of economic activity untaxed while placing an outsized burden on the minority of formally registered entities. KRA data suggests that of the millions of operating businesses in Kenya, only about 250,000 are currently registered for VAT.

For the taxman, the goal is simple: maximize revenue mobilization to fund national development priorities. By removing the threshold, the KRA aims to boost VAT collections from approximately KES 653 billion to over KES 1 trillion annually. Supporters of the move argue that formalization is not merely about taxation it is about bringing small-scale traders into the national database, allowing them to access formal credit markets, government tenders, and institutional support that have historically remained out of reach for the informal sector.

The Compliance Wall

However, the reaction from the business community and independent economists reveals a deep skepticism about the administrative feasibility of this policy. For a small trader, the requirement to register for VAT is not just a change in accounting—it is a transformation of their entire operating model. Under the proposed framework, every business must issue electronic tax invoices through the electronic Tax Invoice Management System (eTIMS), maintain rigorous sales records, and file monthly VAT returns.

This creates a profound compliance challenge. Many small-scale enterprises operate with thin margins, often dealing in cash and relying on simplified, manual accounting. The cost of acquiring digital infrastructure, internet access, and the time required to navigate the KRA portal every month could consume a significant portion of their modest profits. Critics argue that the administrative burden of policing millions of low-turnover entities may ultimately outweigh the marginal revenue gained, a classic inefficiency in public policy that echoes warnings from international bodies like the OECD.

• Current Threshold: KES 5 million annual turnover.
• Proposed Change: Removal of all turnover thresholds.
• Estimated VAT Gap: 38 percent of potential collection.
• Target Revenue Increase: From KES 653 billion to over KES 1 trillion.
• Primary Compliance Tool: Electronic Tax Invoice Management System (eTIMS).

The Economic Ripple Effect

The impact of this policy may extend well beyond the trader’s ledger and into the wallets of the average Kenyan consumer. When a business is forced to collect a 16 percent VAT, it generally has two options: absorb the cost or pass it on to the buyer. Given the current economic climate, where household purchasing power is already strained, analysts warn that the latter is more likely. If the proposal is implemented, consumers could see a price hike across a wide array of goods and services that are not currently zero-rated or exempt.

Furthermore, the move presents a strategic contradiction to previous government commitments. Finance Acts from recent years had signaled an intention to raise, not eliminate, registration thresholds to ease the burden on small businesses and stimulate growth. This sudden reversal leaves many entrepreneurs questioning the long-term stability of the tax environment. Investors and business owners thrive on predictability abrupt changes to the fundamental rules of taxation create friction that can dampen economic sentiment and stifle investment.

A Path Forward or a Policy Trap?

As the debate intensifies, the tension between the state’s need for revenue and the survival of the micro-enterprise sector becomes the central issue of the 2026 fiscal year. While the KRA frames this as a modernization effort to achieve equity, the business community views it as a significant risk to the backbone of the economy. The informal sector is the shock absorber of the Kenyan economy, providing employment and essential goods to the vast majority of the population.

Ultimately, the effectiveness of this policy hinges on more than just the ability of the KRA to collect data. It requires a robust, user-friendly, and cost-effective compliance mechanism that actively empowers, rather than punishes, the small trader. If the government proceeds with this overhaul, the success of the initiative will be measured not by the amount of tax collected, but by whether the small traders survive the process of formalization. Without meaningful support, the attempt to bring the informal sector into the light risks casting an even larger shadow over the economy.