Digital deals, informal hustles: How treasury plans to tax more in 2025

The Principal Secretary for the National Treasury and Economic Planning Chris Kiptoo when he met the National Assembly's Budget and Appropriations Committee discussing the appropriation of funds and the national budget planning at the Argyle Grand Hotel Nairobi Airport on May 29, 2025. [Standard, Kanyiri Wahito]

The Finance Bill, 2025 seeks to broaden the tax base through strategic proposals that expand the digital marketplace and target previously untaxed or under-taxed income sources.

A key amendment to Section 12E of the Income Tax Act includes income from online transactions conducted over the internet or electronic networks, thereby encompassing a wider range of digital activities.

The Bill also introduces new taxable income sources by amending Section 10 to cover earnings from supplying goods to public entities and selling scrap, which were previously excluded from the Income Tax Act's scope of management or professional fees, royalties, interest, and rents.

Additionally, the definition of royalty is expanded to include regular payments for software distribution, further widening the royalty tax base.

The Bill also focuses on non-residents earning income in Kenya, particularly in air transport and ship-owning or chartering businesses.

"... in paragraph (b) of the definition of 'royalty' by inserting the words 'and includes the distribution of software where regular payments are made for use of the software through the distributor' immediately after the words 'support fees'," reads the Bill in part.

An amendment to Section 35 includes gains or profits from these activities as taxable, aiming to capture revenue from non-resident entities.

With approximately eight million active Personal Identification Numbers (PINs), the government aims to increase this figure and reduce nil tax returns, particularly by targeting the informal sector.

Tools like the Electronic Tax Invoice Management System (eTIMS) have proven effective over the past year, and experts suggest giving such initiatives time to bring more taxpayers into the system.

Unlike the contentious 2024 Finance Bill, which sparked unrest, the 2025 bill adopts a less controversial approach while creatively boosting revenue through inclusive tax measures.

James Mulili, PKF Director Eastern Africa, notes that Kenya's tax base should be larger given its population and highlights the government's ongoing challenge to include the informal sector.

He pointed to the Sh34.5 billion collected in VAT in January, largely from oil marketers, as evidence of untapped potential. However, he emphasizes that better collation of economic data, such as fuel consumption trends, could provide insights into disposable income or inflation effects, guiding more effective tax policies.

Mr Mulili remains optimistic about initiatives like eTIMS, which, with sustained effort, could significantly expand the tax net, particularly in the informal sector.