You’ve probably seen it on your store receipt or felt it at the gas pump: Value Added Tax (VAT). Whereas it’s not the most glamorous line item, VAT is a consumption tax levied on the value added to goods and services at each stage of the supply chain, from production to final consumption. What this means is that VAT is borne by the end consumer with businesses acting as collection agents who then remit it to the taxman.
With this in mind, one would expect an upward trajectory on collection however in Kenya, VAT compliance has been a rocky road. For instance, over the past year, growth in VAT collections slipped from double digits back to a meager 3%, and even dipped into negative territory in March 2025. At the root of this decline is a tangled web of fictitious input tax claims and credit notes, and taxpayers who fail to file returns or consistently submit nil returns while simultaneously claiming input tax credits.
While genuine taxpayers continue paying their equal share of taxes, unscrupulous business persons exploit the VAT regime rules by introducing fictitious inputs, allowing certain taxpayers to benefit unfairly while depriving the Government of tax revenue. Other tactics used include the use of stolen identities to register new companies that issue invoices but fail to remit the VAT owed, selective declaration of B2C transactions or input claims from VAT non-filers. To put this in perspective, between July 2024 and April 2025, fraudulent schemes involving fake companies and missing traders cost Kenya’s treasury over Kshs 11.8 billion in lost VAT revenue.
To enhance compliance with the VAT taxation regime, deal with perennial fictitious input claims and other non-conformities, the taxman has recently amplified the compliance monitoring and support framework for VAT registered taxpayers. Among these has been internal administrative controls such as a clean-up of the VAT database, process-centred evaluation on eligibility for VAT registration, and a review of the digital watch list on the iTax platform known as the VAT special table. The digital tool is designed to address compliance inconsistencies while facilitating dialogue between the taxpayer and the taxman for corrective actions. Further, taxpayers are now able to identify and remove erroneous VAT obligations, stop fraudulent use of their tax PIN numbers and distinguish between legitimate, compliant suppliers and those involved in fraudulent schemes.
The outcome of these reforms has seen a significant leap in VAT collection from a negative dip in March 2025 to over 28% growth in May 2025. The taxman continues to engage with taxpayers across various sectors to provide maximum compliance support while simultaneously protecting honest taxpayers and weeding out the bad apples. Taxpayers on the other hand need to ensure that they their data on iTax is updated with correct tax obligations and safeguard their unique identifiers such as ID numbers and tax PINs against misuse. Through the compliance support framework, taxpayers also have an opportunity to come forward and have any outstanding inconsistencies resolved.
Moving forward, the taxman must continually invest in technology and proactively advocate for cross-agency integration as this will seal numerous revenue loopholes. The proposed iTax system upgrades and integration with Business Registration Service databases is a welcome move and crucial for real-time validation of business legitimacy. Further, there needs to be a clear pathway for legitimate businesses to obtain VAT registration without drowning in bureaucracy. The vetting process should be thorough but not prohibitive. Additionally, the penalties for VAT fraud must be severe enough to deter potential offenders and send a clear message that tax fraud carries serious consequences beyond mere administrative inconvenience.
Linda Onyango is a Business & Tax Analyst in Nairobi
