Tax outlook 2026: Navigating Kenya’s evolving landscape

Income Tax remains the largest source of revenue, contributing over 40 percent of total collections, though recent shortfalls highlight vulnerabilities in corporate and PAYE collections. The MTRS signals a policy shift away from sector-specific incentives that have progressively eroded the tax base.

Moreover, we saw an attempt by the Finance Bill 2025 to delete a tax incentive of claiming 100 percent cumulative investment done outside Nairobi and Mombasa or within a SEZ; 15 percent tax incentive for real estate developers that construct at least 100 residential units annually; and 15 percent corporate tax incentive on local assemblers of motor vehicles. We expect such attempts to continue in 2026.

Read: Tracking medium term revenue strategy

Individual income tax is likely to see a review of PAYE bands, potentially widening lower bands but aligning the top individual rate of 35 percent more closely with the corporate rate of 30 percent to stabilise collections from the largest tax head. Bankers are already pushing for this.

For micro and small businesses, KRA plans to exempt them from quarterly instalments and PRN requirements under the Turnover Tax (ToT) regime. With only 30,000 businesses registered and Sh391 million collected in FY 2023/24, uptake has been low.

The exemption will enable tax payments via mobile money, easing compliance and reducing administrative burden. This initiative supports KRA’s broader goal of expanding the taxpayer base from seven million to 11.5 million by June 2027 and raising MSME income tax collections from Sh17 billion to Sh500 billion annually.

Value Added Tax (VAT) reforms may include reviewing the registration threshold upwards from the current Sh5 million, rationalising exemptions and zero-rated supplies, reconsidering the VAT rate, perhaps introducing VAT on selected currently exempt services such as education and insurance, and refining input tax apportionment rules.

Export-oriented businesses could benefit from reduced input VAT from 16 percent to eight percent as intimated by government officials in the recently concluded UK-Kenya Business Forum.

Excise Duty reforms are expected to continue targeting products such as petroleum, tobacco, beverages, sugar, and alcohol content-based taxation.

Further, there are plans by the Kenya to remove excise duty and export levies on kraft paper to support industrial development and export competitiveness.

We hope that the government will also focus on reducing or abolishing excise duty on glass and ceramics considering its housing agenda as introduction of excise duty on such products has been counter productive.

Local manufacturers and dealers are complaining that what is available here does not meet the demand from their clients.

Other anticipated measures include carbon taxes, motor vehicle circulation taxes and surcharge taxes, alongside continued modernisation of the KRA systems, enhanced tax audits, and stronger enforcement.

Tax compliance in 2026 is no longer optional, it is an integral part of business strategy. Local and global tax reforms, digital enforcement, and judicial trends demand active engagement, accurate reporting, and forward-looking planning.

With the Finance Bill expected by April 2026 and enactment by 30 June 2026, taxpayers have an opportunity to participate in shaping policy while ensuring compliance. In this dynamic environment, readiness is the key to navigating Kenya’s evolving tax landscape.

Non-tax revenue has become a key pillar of Kenya’s public finances. For the year ended 3 June 2024, non-tax cash receipts reached Sh129.27 billion, a 57.6 percent increase from the prior year and well above projections.

This growth was driven by digitalisation of service fees through platforms like eCitizen, centralised payments, surpluses from semi-autonomous agencies, and dividends from state investments.

This demonstrates that better management of fees, agency surpluses, and investments can meaningfully supplement traditional tax collections.

Increase in NSSF contributions

From February 2026, the NSSF contributions enter the fourth phase of adjustment, raising the Tier I lower limit from Sh8,000 to Sh9,000 and Tier II upper limit from Sh72,000 to Sh108,000.

The contribution rate remains 6 percent for both employers and employees, however the portion of an employee’s salary that is subject to mandatory NSSF contributions will increase. In this case the maximum employee contribution will increase from Sh4,320 to Sh6,480 per month. Employers should review payroll to ensure accurate contributions and budgeting.

Tax administration reforms

The KRA continues to deepen technology-driven compliance, enhancing risk-based enforcement across sectors. Recent trends include:

The Electronic Rental Income Tax System (eRITS), launched in September 2025, which simplifies rental income registration, filing, and payment, while enabling cross-validation with land registries, utilities, and financial records.

Validation of income and expenses effective 1 January 2026 the KRA shall cross-check income and expenses claimed in corporate returns against eTIMS, withholding tax, and customs records. However, KRA has given taxpayers a one-time opportunity to declare non-eTIMS-supported income and expenses for the period 2025.

Further KRA plans to suspend filing of NIL returns until 31 March 2026 to allow the KRA to validate taxpayer compliance using integrated data sources, including eTIMS, e-invoicing, withholding tax, Customs, and NTSA records. Discrepancies between reported income and visible economic activity may trigger audits, reinforcing compliance risk.

Judicial trends to watch

Among the key court developments that will shape 2026 compliance include:

Carry-forward of tax losses: in the case of Patel v Commissioner for Legal Services & Board Co-ordination Services [2025] KETAT 420 (KLR) the Tax Appeals Tribunal confirmed that pre-1 July 2025 tax losses remain valid, with the new five-year limit applying to tax losses incurred by taxpayers from 1 July 2025. The position may change on appeal.

Read: Kenya seeks to raise tax-free income above Sh24,000

Valid objection to tax assessment must be filed on iTax portal: The High Court in the case of Commissioner of Investigation & Enforcement v Zhao [2025] KEHC 16297 (KLR) held the sixty (60) day timeline for issuing of an objection decision by the Commissioner starts when a taxpayer validly lodges its objection through the iTax system.

The practice has been to allow bulky objections delivered through email or by hand. Implementing this decision in 2026 may be a challenge if iTax capabilities are not enhanced.

Shifting the burden of proof to the KRA: A taxpayer has challenged Section 56(1) of the Tax Procedures Act, which presumes KRA assessments are correct, arguing this shifts an unfair evidential burden to taxpayers and undermines the right to a fair hearing guaranteed by the Constitution. We await to see the court’s decision as this will shape how tax disputes are resolved in Kenya.

Global tax trends

Kenya continues to align with global initiatives, including the Domestic Minimum Top-Up Tax for multinationals, and operationalising Advance Pricing Agreements from 1 January 2026 to pre-empt transfer pricing disputes. Kenya also may be affected by tariffs from its trading partners such as the US.

Conclusion

Alex Kanyi is a Partner at Cliffe Dekker Hofmeyr Inc, Kenya.