Kenya's Parliament Proposes eTIMS Exemption for Small Businesses

Kenya's National Assembly Finance Committee has recommended exempting small businesses from the Kenya Revenue Authority's (KRA) electronic tax invoice management system (eTIMS).

This proposal, which aims to ease the compliance burden on businesses with annual sales below Sh5 million, is currently awaiting approval from Parliament. The adjustment seeks to mitigate barriers that hinder micro traders from supplying larger companies with goods and services. Under the current eTIMS mandate, all suppliers, regardless of their size, are required to issue electronic invoices to document sales. This requirement has disadvantaged small traders, as many larger firms are now reluctant to engage with them due to their inability to generate eTIMS-compliant invoices.

The proposed changes would shift the responsibility of generating these electronic invoices to the larger firms that source products from small suppliers. These recommendations emerged after public consultations concerning the Tax Procedures (Amendment) Bill, 2024, which is under consideration in Parliament. Stakeholders, including the Kenya Association of Manufacturers (KAM), highlighted that the eTIMS requirement poses challenges for farmers and small businesses, many of which lack formal records, Personal Identification Numbers (PINs), or banking facilities.

Transactions are often conducted through M-Pesa or in cash, further complicating compliance. The introduction of mandatory electronic tax invoices through eTIMS, as part of the Finance Act, 2023, was aimed at enhancing tax compliance and reducing evasion. However, the system has faced considerable resistance, with over 81% of registered firms not adhering to the eTIMS requirements. As of June, the KRA reported that only 120,000 of the approximately 663,000 firms in its records had registered for the system.

The intention behind eTIMS is to expand the tax base by requiring firms to submit receipts or invoices as expense proof, thereby mitigating the tendency to inflate sales figures or reduce profits to lower tax liabilities. Nonetheless, the minimal adoption among smaller companies is largely due to a lack of the necessary technical infrastructure and understanding for compliance. Concerns about the viability of eTIMS for small businesses have been raised by tax consultants and business analysts alike. KPMG indicates that the proposed amendments could provide essential relief for small traders who play a crucial role in Kenya's economy, particularly within the informal sector.

PwC analysts previously cautioned that non-compliance with eTIMS could significantly hinder small businesses' ability to conduct transactions with larger firms. The suggested amendments represent a pragmatic consideration of the need to balance tax compliance with the realities faced by small businesses. Initially, the KRA aimed for 51% of businesses to register for eTIMS by June 2025.