The Kenya Revenue Authority (KRA) has proposed repealing a law that exempts small businesses and farmers from issuing electronic tax invoices through the Electronic Tax Invoice Management System (eTIMS). The law, enacted on December 27, 2023, freed firms with annual sales below KSh5 million from mandatory e-invoicing. This move was initially celebrated as a progressive step toward reducing the compliance burden on Kenya’s vast informal sector.

But now, KRA argues that the exemption has hindered its efforts to broaden the tax base by making it harder to track transactions in micro and small enterprises. Before the exemption, all suppliers were required to issue electronic invoices, creating a digital trail of economic activity that supported revenue collection.

Understanding the exemption

Section 23 A (3A) of the Tax Procedures Act states that where a supply is received from a small business or a small-scale farmer, whose annual turnover does not exceed KSh5 million, the purchaser shall issue a tax invoice to ascertain tax liability. This means that a small business or farmer not registered for Value Added Tax (VAT), and not using e-TIMS, can still sell to larger firms, provided the buyer takes on the invoicing responsibility.

This exemption was a nod to the realities of doing business in rural and low-income urban settings, where digital infrastructure is patchy, financial literacy is low, and regulatory compliance can be costly and intimidating for micro-entrepreneurs.

Tax Invoices are issued on supply subject to taxation in Kenya. This is mostly regarding VAT. In Kenya, VAT is a consumption tax charged under the Value Added Tax Act, 2013, on the supply of goods and services. Supplies are categorised as zero-rated, exempt, or standard-rated. The tax is charged on the value added at various production stages and different distribution levels of goods or services.

The VAT Act requires that a person who during business makes taxable supplies or expects to make taxable supplies whose value is KSh5 million or more within 12 months or is about to commence making taxable supplies whose value is expected to exceed the amount and period, shall be liable for registration and apply to the commissioner for registration.

Taxpayers are required to account for the tax at the time of supply and file and make payment not later than the 20th day of the following month in which the supply occurred.

VAT in Kenya is based on the destination principle and allows for a zero-rated export. Generally, all goods and services are vatable unless expressly provided under the Act as exempt supplies. Exempting certain supplies is to lower the cost of essential goods and services or promote certain investments. 

The compliance imperative

From the KRA’s perspective, however, the exemption has created a loophole that limits visibility into the informal economy. Although it represents over 80% of employment in Kenya, it contributes only modestly to tax revenue.

VAT, the cornerstone of Kenya’s consumption-based tax regime, relies on a chain of digital invoices to account for tax at each stage of production and distribution. If small traders fall outside this system, their transactions disappear from the national tax record, denying the government critical revenue and weakening the integrity of VAT audits.

The risk of overreach

While the goal of increasing tax compliance is valid, repealing the exemption outright could backfire. Small businesses, particularly in agriculture and informal retail, might exit formal trade rather than comply with complex and costly digital systems. Worse still, they could lose access to large clients, including government agencies and corporates, who increasingly require e-TIMS-compliant documentation to account for their expenses.

Finding a middle ground

Tax compliance should not come at the cost of economic exclusion. Therefore, instead of a blanket repeal, policymakers should consider more nuanced approaches, such as:

• Tiered compliance thresholds that gradually introduce e-TIMS requirements based on turnover or industry risk.
• Incentive-based compliance, such as tax credits, grants, or fast-track registration for those who voluntarily adopt e-TIMS.
• Shared invoicing platforms for cooperatives or producer groups, allowing smallholders to pool resources and access compliant systems.
• A simplified VAT regime for micro-entities, modelled on presumptive tax frameworks, minimising the need for formal accounting while contributing to national revenue. 

Inclusion before enforcement

The real challenge isn’t just bringing small businesses into the tax net – it’s keeping them there. Kenya’s tax policy should aim to build trust and demonstrate value, rather than enforce compliance through punitive mandates. By taking a collaborative, phased, and supportive approach, the government can grow its tax base without shrinking its economy.