The Kenya Revenue Authority (KRA) requires that a person who supplies taxable goods and or services with a value of Ksh 5 million or more annually should be registered as a taxpayer under the VAT Act. Registration has been carried out independently by taxpayers through the online I-tax portal, in line with the government’s digital transformation agenda aimed at improving the ease of doing business. However, the Authority notes that online registration has created tax leakages, thus prompting them to halt online registration and requiring taxpayers to make manual registration.

KRA has suspended online VAT registration, requiring taxpayers to present themselves in person at KRA offices for registration. This significant shift follows an alarming rise in VAT fraud cases, particularly involving the ‘Missing Trader Scheme’, a systemic abuse of the VAT system where businesses create fictitious transactions to claim tax refunds or evade tax obligations. The suspension of online registration is aimed at allowing the Authority to clean up its registers and weed out ghost traders suspected of siphoning billions of shillings through fraudulent schemes. Furthermore, manual registration will enable the authority to seal any loopholes by requiring proof of identity from the taxpayer.

KRA claims that the convenience of online registration inadvertently opened doors for fraudsters who, in some cases, used stolen or fake identification documents to register ghost firms. These companies then issued fake invoices and engaged in paper-only trading to siphon an estimated Kshs 2.5 billion monthly through fraudulent VAT claims.

The Missing Trader Scheme is a form of VAT carousel fraud in which businesses simulate legitimate transactions—complete with invoices, electronic filings, and VAT returns—without supplying goods or services. The aim is to:

• Claim fictitious input VAT to reduce tax payable.
• Create artificial costs to offset actual revenue.
• Hide the true economic beneficiaries behind layers of fake transactions.

While appearing compliant on paper, these firms are often non-operational, untraceable, or based on stolen identities.

In response, KRA has adopted a physical verification strategy. All new VAT applicants must now visit KRA offices in person, a move designed to reinforce identity checks and deter registration using forged documents. Previously, applicants could register entirely online, keying in their details and receiving VAT certificates automatically. While efficient, this process lacked sufficient identity verification, making it ripe for abuse. This manual shift is part of a broader KYC initiative, mirroring protocols in the financial sector where service access is conditional on in-person identity verification to curb fraud and ensure compliance.

VAT Guideline 2023: The Special Table Category

KRA is also leveraging a tool called the VAT Special Table within the iTax system. This feature categorises taxpayers into risk profiles and restricts their ability to perform certain VAT-related activities such as filing returns or claiming refunds.

Who Gets Flagged on the Special Table?

1. Payment Returns Without Payments (PRWPs): Entities that file returns but make no payments for six months and cannot be traced. Those in repayment plans or making partial payments are exempt from this requirement.
2. eTIMS Non-Compliant Traders: Taxpayers failing to comply with the 2020 requirement to transition from traditional ETR to eTIMS.
3. Non-Filers: Entities that have not filed any VAT returns for six months or more.
4. Nil Filers with Input Claims: Taxpayers filing nil returns for six or more consecutive months while claiming input tax are a red flag for potential fictitious transactions.
5. Missing Traders: Registered taxpayers who, upon investigation, are found to be claiming fake input VAT or issuing fictitious credit notes.

A recent KRA audit revealed that out of 90,127 VAT-registered cases listed in the Special Table, 20,981 were inactive, suggesting either dormancy or deliberate tax evasion. KRA is now moving to bulk deregister these inactive taxpayers. Others are under review for potential suspension, thereby reducing the likelihood of their continued involvement in fraudulent activities.

Conclusion 

KRA’s decision to halt online VAT registration is a bold but necessary step in light of the systemic abuse exposed by the Missing Trader Scheme. The manual approach may temporarily inconvenience genuine taxpayers, but it is vital for rebuilding trust and integrity in the VAT system.

However, if Kenya is to maintain its progress toward a modern, digital tax ecosystem, KRA must balance compliance enforcement with service accessibility. This means:

• Reintroducing online registration with enhanced KYC safeguards.
• Communicating timelines for the return of digital services.

Ultimately, combating VAT fraud should not come at the expense of frustrating law-abiding taxpayers. A smart, hybrid system, backed by robust data verification, would serve both enforcement and economic growth objectives more effectively.

Fact Box

VAT Special Table: KRA

These guidelines within the VAT system restrict certain VAT-registered taxpayers from filing returns or claiming input tax,  aiming to prevent VAT fraud and non-compliance.

Who does it apply to?

1. Payment Returns Without Payments (PRWPs): Entities that file returns but make no payments for six months and cannot be traced. Those in repayment plans or making partial payments are exempt from this requirement.
2. eTIMS Non-Compliant Traders: Taxpayers failing to comply with the 2020 requirement to transition from traditional ETR to eTIMS.
3. Non-Filers: Entities that have not filed any VAT returns for six months or more.
4. Nil Filers with Input Claims: Taxpayers filing nil returns for six or more consecutive months while claiming input tax are a red flag for potential fictitious transactions.
5. Missing Traders: Registered taxpayers who, upon investigation, are found to be claiming fake input VAT or issuing fictitious credit notes.

Implications

1. Taxpayers under this special table shall be blocked from filing. The system displays: “This PIN is under review for VAT compliance irregularities. Contact your KRA Tax Service Office (TSO).”
2. Penalties shall be levied for non-filing and will be paid to the KRA; they will not be automatically enforced.
3. Claims from nil-filers, non-filers, and flagged missing traders are automatically blocked.
4. Other taxpayers cannot claim input VAT from suppliers on the Special Table as the system will reject such claims, and a message shall be displayed as follows: “This PIN is not eligible for input tax deduction.”
5. If a supplier is flagged as a PRWP but correctly declares a sale, the buyer can apply to their TSO to have input VAT allowed, providing full supporting documents as per Section 17(2) of the VAT Act.
6. Taxpayers flagged for not transitioning to eTIMS must visit their TSO to complete the onboarding process.