Treasury targets Sh174 billion from tax cheats

The government has refrained from aggressive tax-raising measures in the Finance Bill 2025, and instead is leaning towards sealing leakages to avoid a repeat of youth-led protests that met last year’s tax hikes.

From the bill, Treasury hopes to raise about Sh30 billion in extra revenues, forcing the State to turn on tax cheats and those who fail to pay taxes, notably in the informal sector.

The deadly anti-government protests forced the State to withdraw the Finance Bill 2024 that sought to impose taxes worth Sh345 billion on goods ranging from bread to diapers.

“The Finance Bill 2025, has neither proposed new taxes nor raised any tax rates. Instead, we have chosen to enhance tax revenue collection through administrative reforms by simplifying and streamlining tax laws, to make them clearer and easier to implement, thereby improving taxpayer compliance,” said Treasury Cabinet Secretary John Mbadi when he presented the budget on Thursday.

The draft Finance Bill has departed from popular tax-raising measures such as higher excise duty on products such as alcohol, airtime, data, cigarettes, alcohol and confectionery.

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The Treasury has instead favoured the reduction of tax exemptions, which has seen a variety of goods moved from VAT zero-rating to exempt status, while some will attract the consumption tax.

Under zero rate, firms are allowed to seek refunds from the KRA for VAT they pay on inputs like electricity, fuel and raw materials. For exempt, they are not allowed to claim the refunds, which often sees the producers pass on the VAT on inputs to consumers.

Treasury reckons that producers have abused the refunds model by not transferring the benefits to consumers, arguing they have enriched themselves from the reimbursement.

Tax foregone from zero-rating that was due as refunds rose from Sh98.4 billion in 2021 to Sh510 billion in 2023 or 3.4 percent of gross domestic product.

“To reverse this trend, the Finance Bill 2025, proposes reforms to rationalise tax expenditures to promote equity, fairness, efficiency and reduce distortions within the tax system,” said Mr Mbadi.

The focus on tax cheats has seen KRA start integrating its system with banks, money remittance firms and payment service providers in efforts to weed out tax evaders and boost revenue.

The government has been caught between the competing demands of hard-pressed citizens and lenders such as the IMF, which is urging the government to cut deficits to obtain more financing. Out of the Sh4.29 trillion budget, Sh3.134 trillion will go to recurrent spending while development will consume Sh693.2 billion as counties receive Sh474.9 billion.

KRA is expected to be aggressive with tax cheats flagged after it conducted a series of background checks, lifestyle audits and vetting.

]The KRA’s intelligence unit has in the past said tax evasion schemes used by companies and wealthy individuals largely range from under-stating sales to inflation of expenses, which results in lower profits.

Reduced profit translates to lower corporate taxes, which are based on 30 percent of profits posted by local firms.

Others understate salaries paid to workers to reduce PAYE obligations, while others overstate the value of purchases of raw materials to claim more VAT refunds.

KRA is leveraging on increased use of data and linkages between KRA systems with third parties such as banks and mobile money platforms like M-Pesa to spy on taxpayers’ activities, use of Internet-enabled cameras at excisable goods processing plants and full rollout of digital electronic tax registers (ETRs) to grow revenue.

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