Kenya is planning a major overhaul of its Value Added Tax (VAT) system, which would bring small-scale traders into the formal tax net and potentially boost revenue by an estimated $7.7 billion (KSh1 trillion), local media outlets are reporting.
The proposal would remove the current ~$38,000 (KSh5 million) annual turnover threshold for VAT registration, requiring all businesses, regardless of size, to charge, remit, and account for the tax.
The move forms part of the Kenya Revenue Authority’s (KRA) broader effort to expand the country’s tax base and improve compliance. Currently, around 230,000 businesses are registered for VAT, representing only a fraction of the eligible population. Eliminating the threshold aims to capture a wider segment of commercial activity and close gaps in revenue collection, which last year totalled $5 billion (KSh653 billion) from VAT alone.
Stricter compliance, higher operating costs
For micro and small enterprises, the proposed change would increase administrative responsibilities. Businesses would need to maintain detailed sales records, issue compliant tax invoices, and file monthly returns. These obligations are expected to place particular strain on firms with thin margins and limited administrative capacity.
Consumer-facing sectors could see price adjustments as traders incorporate VAT into their pricing, affecting everyday goods such as mobile phones, cooking gas, and soft drinks. For households, the change may translate into higher costs for essential items, while small firms navigate the additional compliance burden.
Revenue gains vs. political sensitivity
The KRA projects that broadening the VAT net could push collections beyond KSh1 trillion, strengthening fiscal stability without raising the statutory rate. For the government, the proposal is a strategic step toward reducing reliance on debt amid rising servicing costs and persistent budget deficits.
Tax policy remains a politically sensitive issue in Kenya. Previous attempts to increase tax rates in 2024 and 2025 sparked nationwide protests, disrupting business activity and slowing economic growth. With 2026 shaping out to be a pre-election year, expanding VAT obligations could provoke public discontent, complicating the government’s broader economic agenda and bid for a second term.
Importantly, the rule has not yet been implemented. It is still under review and requires approval through legislative processes before it can take effect, giving both businesses and policymakers time to assess the potential impacts.
Balancing growth and compliance
The VAT threshold amendment presents a fiscal trade-off: expanding revenue from a broader tax base while risking operational strain on micro and small enterprises. Policymakers will need to manage this balance carefully to avoid disruptions in informal economic activity.
As the proposal progresses through the legislative process, stakeholders will be monitoring how Kenya enforces compliance while supporting small enterprises through the transition. The reform’s ultimate success will likely depend on achieving higher revenue mobilisation without undermining the viability of the country’s most vulnerable firms.
NB: $1 = Ksh129.5 as of March 23, 2026
