As the National Treasury prepares the FY 2027/28 Budget, broadening the tax base remains central to the Government’s efforts to increase domestic revenue and reduce reliance on borrowing. However, the success of this agenda will depend on whether Kenya can bring more economic activity into the formal tax system without making it harder for businesses to survive and grow. 

The Challenge of Bringing Informal Businesses into the Tax Net 

Kenya’s revenue challenge is not simply a matter of collecting more taxes. It is also a matter of who pays, how much they pay, and whether the existing system makes compliance practical for businesses of different sizes. While established companies operate within formal regulatory and reporting structures, a significant share of economic activity occurs among informal traders, small enterprises and businesses with limited administrative capacity. Expanding the tax base therefore requires a strategy that addresses both tax evasion and the barriers that prevent businesses from formalising. 

The National Treasury’s Medium-Term Revenue Strategy recognises the difficulty of taxing informal and digital economic activity. The National Tax Policy likewise identifies complex tax procedures, high compliance costs, limited taxpayer awareness and inadequate information sharing among government agencies as challenges to revenue collection. These constraints suggest that Kenya’s revenue problem cannot be resolved by enforcement alone. 

Digitalisation Must Make Compliance Easier 

The Government has made progress in digitising tax administration, including through iTax and the Electronic Tax Invoice Management System (eTIMS). These platforms can improve transaction visibility, strengthen record-keeping and help the Kenya Revenue Authority (KRA) identify discrepancies in reported income. However, digitalisation works best when businesses can understand and comply with their obligations. For a small enterprise with limited accounting support, maintaining records, navigating tax requirements, and meeting filing deadlines can be costly. Where compliance becomes disproportionately burdensome, businesses may remain informal or underreport their activities rather than transition into the formal economy. 

Making Formalisation Practical and Beneficial 

The Government needs a broader tax base, but businesses need a predictable and manageable regulatory environment in which formalisation delivers tangible benefits. Registration alone does not guarantee compliance, particularly when businesses see little value in entering the formal system beyond incurring additional tax obligations. 

A more sustainable approach would begin by simplifying compliance for micro,

small and medium-sized enterprises. Tax obligations should be proportionate to business size, turnover and administrative capacity, with clear guidance on registration, filing and payment. Simplified regimes should not become permanent tax exemptions, but rather transitional measures that help businesses build the capacity to comply as they grow. The KRA should also strengthen taxpayer education and provide accessible support for businesses navigating the system. 

At the same time, broadening the tax base should not mean concentrating enforcement on businesses that are already visible and compliant. Established companies are easier to audit because they maintain formal records, file returns and conduct traceable transactions. Repeatedly increasing the compliance burden on these businesses while leaving substantial economic activity outside the tax net risks creating an uneven playing field. Revenue mobilisation must therefore be accompanied by stronger efforts to address underreporting, illicit trade and tax evasion across the economy. 

Reviewing Tax Incentives and Exemptions 

The Government also needs to review tax expenditures and exemptions. It should assess whether existing incentives deliver measurable economic benefits, such as investment, employment, exports and local production. Incentives that no longer serve their intended purpose should be reconsidered, while those supporting strategic economic objectives should be transparent, targeted and periodically evaluated. This would allow the Government to recover revenue without automatically introducing new taxes or increasing the burden on existing taxpayers. 

Aligning Revenue Collection with Economic Growth 

Ultimately, the effectiveness of Kenya’s tax policy will depend on the relationship between revenue collection and economic growth. Businesses that expand, employ more people and increase their taxable activity help build a more sustainable revenue base. Conversely, policies that raise compliance costs, discourage investment or push smaller enterprises further into informality may undermine the very revenue objectives they aim to achieve. 

As the Government develops the FY 2027/28 Budget, it should treat broadening the tax base as a structural reform rather than a short-term revenue target. This requires simpler tax administration, fairer enforcement, better taxpayer support and greater accountability for public expenditure. Kenya must build a system where compliance is practical, the tax burden is distributed fairly, and formalisation supports business growth. A wider tax base will ultimately depend not only on the Government’s ability to collect revenue, but also on its ability to create an economy in which more businesses can operate formally and sustainably.