The Kenya Revenue Authority (KRA) is preparing for a major overhaul of value-added tax (VAT) that would require small businesses to pay a 16% tax.
The taxman wants to amend Section 34(1a) of the VAT Act to remove the KSh 5 million annual turnover limit for mandatory registration. This move would drop the registration threshold to zero, effectively forcing every business – including micro-enterprises and small-scale traders – to register for VAT and serve as tax collection agents.
KRA believes that eliminating this limit will close the estimated 38% VAT collection gap. The authority projects that this change will boost tax revenue from KSh 653 billion to more than KSh 1 trillion.
This plan marks a sharp U-turn from the government’s previous strategy, which suggested raising the registration limit to make tax compliance easier for small businesses.
If the amendment passes, even micro-enterprises will have to add VAT to their taxable goods and services and send those payments to KRA every month. If put into action, the policy will likely cause prices to jump as traders shift the extra tax cost onto their customers.
The KRA’s push to scrap the threshold is a significant policy shift that effectively targets the “informal” economy to plug a massive revenue hole. While the move aims to capture the 38% VAT collection gap, it creates a direct clash with existing government promises to protect small businesses.
This new proposal creates a confusing contradiction for business owners. On one hand, the Finance Bill 2024 and early drafts of the 2025/26 budget suggested raising the threshold to KSh 8 million to reduce the compliance burden on MSMEs. On the other hand, KRA is now proposing a zero threshold, which would force every “Mama Mboga” and small trader to become a tax agent.
The push to remove thresholds has already begun in other sectors. Under the Finance Act 2025, the government successfully removed the KSh 5 million threshold for non-resident entities (foreign digital service providers). KRA is now attempting to apply this same “no-minimum” logic to domestic small businesses.
The post KRA Targets Informal Economy With Plan to Force Small Businesses to Pay 16% Tax appeared first on Bossnana.
