Domestic Value Added Tax (VAT) collections grew by a record pace of 28.2 percent to an all-time high of Sh32.1 billion in May, coinciding with a purge on a fraudulent scheme that was costing the State approximately Sh2.5 billion monthly.
Internal reports by the Kenya Revenue Authority (KRA) showed that domestic VAT collections from medium and small traders grew sharpest by 39.7 percent to Sh6.98 billion in May, while collections from large traders grew by 25.3percent to 25.15 billion for the month –lifting the overall collections for the 10 months to May 2025 by three percent to Sh295.8 billion.
Insiders at KRA attributed the record domestic VAT collections in May to a crackdown on a fraud scheme in which some rogue traders took advantage of loopholes to siphon billions of shillings through fictitious transactions.
“The record performance confirms a clear case of human behaviour. Some people had been playing games with the system and once actions were taken against them things changed for the better” a top official at KRA told Business Daily.
The Sh32.1 billion VAT collections in May were higher than the Sh32.05 billion netted in January when collections are traditionally at their highest point due to large-scale consumerism linked to the Christmas festivities.
The taxman confirmed the improved VAT collection performance and vowed to further tighten the noose on fraudsters even as the number of new applications for VAT registrations dropped sharply.
Records obtained by the Business Daily show that VAT registration applications dipped to 317 in May compared to a peak of 1,980 in March this year —an indication that a purge by the taxman may have rattled some fraudsters.
VAT collected at a rate of 16 percent is an indirect tax paid by the person who consumes taxable goods and services supplied in Kenya or imported into the country. VAT on goods and services offered in Kenya is collected at designated points by VAT-registered persons who act as the agents of the government. VAT on imported goods and services is paid by the importer.
Any person supplying or who expects to provide taxable goods and services with a value of Sh5 million or more in a year is required to register for VAT, according to the VAT Act.
In instances where one has not attained the Sh5 million threshold, voluntary registration can be granted subject to conditions. The VAT-registered persons or businesses are identified with Personal Identification Numbers (PINs) with a VAT obligation.
VAT works under the input/output tax system, whereby input tax refers to a tax paid by a registered person on the purchase of goods or services for his or her business. Output tax, on the other hand, refers to tax charged on the sales of taxable goods or services. Tax payable is the difference between the output tax and the input tax.
KRA in April launched a crackdown after an internal systems audit revealed that VAT collection performance had been subdued by fraud by some traders through the notorious ‘Missing Trader Scheme’, which involves issuing fictitious invoices to depict a business transaction where no goods and services were supplied.
In the ‘Missing Trader Scheme’, firms simulate a genuine trading process by trying to meet all the legal requirements of a ‘supply’ for tax purposes. However, the traders in the fraudulent scheme do not supply any goods or services, but “payment” is made to create a notional cost of goods sold.
The scheme aims to conceal and obscure the ultimate economic beneficiary of the purchases to avoid tax obligations.
“A thorough review of VAT data has revealed that unscrupulous traders are registering new companies solely to perpetrate VAT fraud. This fraud typically involves multiple companies or individuals, known as “missing traders,” who vanish with the VAT owed, severely undermining our tax collection efforts,” KRA revealed in an internal report.
The KRA audit identified 4,434 suspected “missing traders” after a paper trail of alleged business transactions proved unsuccessful.
The audit revealed that 2,080 traders sent invoices totalling Sh19.69 billion with VAT implications of Sh2.94 billion but have filed Nil or no VAT returns since July 2024, while beneficiaries claimed purchases worth Sh13.64 billion, resulting in a potential VAT loss of Sh2.14 billion.
The review by KRA also showed that 2,345 taxpayers filed VAT returns between January and March 2025, but did not remit VAT payments, with the outstanding amount from these taxpayers standing at Sh2.54 billion from July 2024 to March 2025.
The inspection revealed that out of approximately 90,127 existing VAT obligations cases listed under a special category known as ‘special table’, some 20,981 were inactive taxpayers, raising suspicion of tax evasion schemes through fictitious transactions.
“These (inactive taxpayers) have been targeted for bulk deregistration to clean up the register and reduce opportunities for fraud. The remaining taxpayers under the special table are undergoing further review to determine eligibility for dormancy or suspension status, thereby limiting their ability to engage in fraudulent activities,” KRA said about the inactive taxpayers on its VAT ‘Special Table’.
The KRA purge also saw some 475 officers moved from approving applications for VAT registration–leaving only 170 of them handling the delicate task.
