Why Mbadi wants you to file nil tax returns five months earlier under new rules

Treasury Cabinet Secretary John Mbadi. [Boniface Okendo, Standard]

Kenyans who declare zero income to the taxman must file returns by January 31 from next year, five months earlier than the current deadline.

Treasury Cabinet Secretary John Mbadi, presenting the 2026-27 budget statement to the National Assembly on Thursday, June 11, said the uniform June 30 deadline for all taxpayers left the Kenya Revenue Authority (KRA) with no room to verify and validate filed returns before a new financial year began.

Under the Finance Bill 2026, taxpayers with nil returns must file within one month after the end of the year of income, meaning by January 31.

Taxpayers with income (PAYE) will have until April 30, a two-month compression of the current six-month window after the end of the calendar year.

Business taxpayers will continue filing by June 30.

According to Mbadi, the shorter filing timeline is designed to give KRA earlier visibility into taxpayer liabilities and accelerate the flow of revenue into government coffers.

The deadline changes arrive against a backdrop that Mbadi described as a national embarrassment: only 3.1 million working Kenyans Pay as You Earn (PAYE) tax, while millions who earn incomes in the economy declare nothing.

"Many of these people have been filing nil returns year after year. The burden of developing this country has therefore been on a few of us. This must change," he said.

New tax measures

The proposals are part of a broader package that the government projects will raise an additional Sh98.9 billion in revenues for the 2026/27 budget.

Among the accompanying measures is the introduction of pre-populated tax returns, under which KRA will fill in returns using data it already holds, leaving taxpayers to review, confirm or amend the information before submitting.

A six-month tax amnesty beginning July 1, 2026 is also proposed, covering liabilities that accrued up to December 31, 2025.

Taxpayers who settle principal tax within the window will have related penalties, interest and fines waived.

A previous amnesty under the Tax Procedures (Amendments) Act 2024 covered liabilities up to December 31, 2023.

KRA will also be empowered to waive penalties and interest of up to Sh2 million arising from errors in its own electronic systems, an acknowledgement that system failures have unfairly penalised compliant taxpayers.

On income tax, the Bill proposes a 20 per cent withholding tax on winnings from lotteries and prize competitions as digital betting platforms continue to expand, and a 1.5 per cent withholding tax on payments to scrap metal dealers.

Residential rental income tax also rises from 7.5 per cent to 10 per cent, supported by agent-based withholding systems meant to improve compliance.

Companies that hold back dividends indefinitely to defer dividend tax will face a new minimum deemed dividend distribution threshold of 60 per cent of undistributed income.

The Bill also proposes to tax offshore transfers of shares whose value derives from assets located in Kenya, closing a loophole that allowed some transactions to be structured abroad to avoid local tax.

The corporate tax rate for non-resident petroleum contractors drops from 37.5 per cent to 30 per cent under the same Bill, while gains from property transferred into approved Real Estate Investment Trusts (REITs) will be exempt from Capital Gains Tax and Stamp Duty.

Excise duty

On excise duty, the government proposes to remove the levy on bottled water to improve affordability, while raising excise duty on sugar-sweetened beverages from Sh14.14 to Sh20 per litre.

Excise duty on Extra Neutral Alcohol drops from Sh500 per litre to Sh80 per litre. Mobile phones will attract a single excise duty rate of 25 per cent charged at the point of activation, replacing the current layered tax structure.

A 10 per cent excise duty on both imported and locally manufactured plastic articles is proposed to promote environmental sustainability.

On value-added tax, mitumba will only attract VAT at the point of importation, with local sales exempted.

Dialyzers used in kidney treatment will also be VAT-exempt to reduce the cost of renal care.

Foreign portfolio investors get relief under the same Bill, with a proposal to exempt them from obtaining a KRA Personal Identification Number (PIN) solely to open Central Depository and Settlement Corporation (CDSC) accounts on the Nairobi Securities Exchange (NSE).