Tax compliance and broadening the tax base are pivotal to the Kenya Revenue Authority’s (KRA) strategy for enhancing national revenue and ensuring equitable economic participation across all sectors. However, despite the extended deadline, over 80% of businesses in Kenya have yet to adopt the KRA’s new electronic tax invoice management system, eTIMS.

As of June 2024, the latest KRA data shows that only 120,000 out of approximately 660,000 businesses with taxable income (about 18.1%) had registered for eTIMS. This leaves over 540,000 businesses (81.9%) still unregistered.

Introduced through an amendment to Section 16 (1) of the Income Tax Act via the Finance Act 2023, eTIMS requires businesses to issue electronic receipts for transactions such as supplier payments, utilities and marketing expenses. Although the original compliance deadline was January 2024, KRA extended it to March 2024 to provide businesses with additional time to transition to the new system.

Rationale

Under the current system, all individuals and entities conducting business in Kenya are required to electronically generate and transmit their invoices to KRA via eTIMS. This initiative is part of KRA’s broader strategy to modernise tax administration and include the informal economy within the tax framework. KRA also aims to enhance revenue collection by targeting all businesses, regardless of  Value Added Tax (VAT) registration.

eTIMS, therefore, allows KRA to monitor business transactions in near real-time, helping to identify discrepancies when firms file their tax returns. This capability enables a more accurate estimation of corporate income tax, which is paid quarterly, and improves transparency in tax administration. By minimising the potential for large firms to inflate expenses and underreport profits, eTIMS promotes fairer tax assessments and supports accurate reporting of smaller suppliers.

Although large businesses have predominantly led the way in adopting eTIMS, smaller firms have been hesitant due to concerns about technical complexity. This reluctance could put smaller businesses at a competitive disadvantage, as embracing eTIMS presents several compelling advantages for businesses. But why should businesses be compliant?

Increased tax compliance

The eTIMS system’s real-time tax invoice output feature is crucial for enhancing tax compliance. Instantly transferring tax invoices to the relevant authorities minimises delays and boosts the likelihood of compliance. This system provides businesses with the necessary tools to declare taxes accurately and promptly, reducing the risk of penalties.

An eTIMS invoice includes essential details such as the seller’s PIN, issuance date and time, serial number, buyer’s invoice number, and total amounts (both gross and tax). These automated features minimise human error, ensuring that tax invoices are generated correctly, which reduces audit complications and enhances business credibility. Due to the system’s efficiency, businesses compliant with eTIMS can benefit from reduced compliance costs.

Increased flexibility

eTIMS is a free platform that offers solutions accessible across multiple channels. Unlike previous requirements that necessitated significant hardware investments, eTIMS provides accessibility through mobile phones, laptops, and desktops. This is through options such as an online portal, client software, mobile application, and USSD code ( *222#). This flexibility creates a fair business environment for both small entrepreneurs and large firms.

The system also allows businesses to maintain records of invoices issued through the taxpayer portal, simplifying tax return filing and invoice management. This reduces administrative burdens, enabling businesses to focus on their core operations.

Faster processing of VAT refunds

Businesses using eTIMS find it easier to process VAT refunds because invoices are sent directly to the KRA in real time. Accurate invoices, reconciled with submitted tax returns, significantly reduce the time needed for auditing and processing refunds.

Legal repercussions of non-compliance

Compliance with eTIMS is essential to avoid legal issues. Expenses not supported by valid eTIMS invoices are ineligible for income tax deductions. Non-compliant businesses may face fines for non-registration along with other setbacks like VAT refund holds and denial of tax compliance certificates.

Way forward

Granted, KRA has set an ambitious goal to register 51% of businesses on eTIMS by June 2025. Targeted outreach and capacity-building efforts are crucial, especially for small and medium enterprises (SMEs) that may face challenges with eTIMS onboarding. Without compliance, these firms risk legal consequences for failing to meet tax obligations under eTIMS.