Global audit firm explains new KRA rules behind income tax and their implications
By Kenneth Mwenda, February 4, 2026The Kenya Revenue Authority (KRA) has changed how it checks income tax returns, marking a major shift in tax enforcement. From January 2026, the authority will validate every figure declared in income tax returns against real-time electronic data at the point of filing.
Under the new system, KRA cross-checks declared income and expenses using data from the Electronic Tax Invoice Management System (eTIMS), withholding tax records, and customs import information. The checks apply when taxpayers submit their 2025 year of income returns through the iTax platform.
Tax advisory firm KPMG says the change fundamentally alters Kenya’s tax compliance framework.
“The move to eTIMS-based income and expense validation represents a fundamental shift in Kenya’s tax compliance landscape,” the firm states in a recent tax alert.
“By anchoring tax outcomes to electronic transaction data, KRA is transitioning towards continuous, automated enforcement, with reduced tolerance for post-filing explanations,” KPMG adds.
Previously, taxpayers filed annual summary returns, which KRA reviewed later through audits or queries. That process allowed room for explanations after filing. The new approach moves enforcement to the transaction level, with validation happening instantly as returns are submitted.
Rules apply across the board
Expenses without matching, compliant eTIMS invoices now face automatic disallowance, unless they fall under specific legal exemptions. The rules apply across the board, covering companies, partnerships, sole proprietors, professionals, Turnover Tax payers, and landlords earning rental income.
They apply to both taxable and exempt supplies, though KRA places particular focus on income recognition and expense deductibility.
The changes stem from amendments introduced under the Finance Act 2023 and the Electronic Tax Invoice Regulations 2024. These laws require nearly all businesses to issue electronic tax invoices, even if they are not registered for VAT.
KRA compares declared income against eTIMS and withholding data and uses the higher figure to identify undeclared income. For expenses, it relies on the lower of the amounts claimed by the taxpayer and those appearing in eTIMS purchase records. Any mismatch results in upward tax adjustments, penalties, interest charges, and possible delays or denial of a Tax Compliance Certificate.
Employed Kenyans with side income
KRA has also clarified how employed Kenyans with side hustles should file their annual income tax returns. In a notice issued on February 3, 2026, the authority said salaried individuals must declare all sources of income in a single return, not just their salary.
“If employed, but have additional income, declare your employment income together with any additional income, for example, freelance, consultancy, online services, farming, or other income-generating activities,” KRA stated.
The authority explained that filing employment income alone does not give an accurate tax position where a taxpayer earns extra income. Employees should declare salary details using the P9 form available on iTax, then include any additional income earned during the year, even if it was irregular.
KRA added that individuals running businesses without formal employment must declare all income earned during the year where it was not already covered under the Turnover Tax regime. Taxpayers with no income in 2025 but holding an active PIN must still file a Nil Return.
Rules, exemptions and risks
A public notice issued by KRA in November 2025 confirmed the new approach.
“Effective 1st January 2026, it will begin validating income and expenses declared in both individual and non-individual income tax returns against the following data sources: TIMS/eTIMS, withholding income tax gross, and import records from Customs,” it stated.
The notice added that all declared items must be supported by a valid electronic tax invoice, correctly transmitted with the buyer’s PIN, where applicable, subject to exemptions provided under Section 23A of the Tax Procedures Act.
The law provides exemptions for specific transactions. These include salaries and PAYE income, imports of goods or services, charges from financial institutions such as insurance premiums, final withholding tax items like certain dividends and interest, airline tickets, internal accounting adjustments with no supply, investment allowances, and any other items exempted by the Commissioner.
Taxpayers must clearly document these exemptions. Failure to do so may trigger system flags or automatic disallowances during submission.
In practice, the new system presents several challenges. Because validation happens at submission, iTax may block or flag returns if figures do not match KRA’s data, exposing taxpayers to late filing penalties. Supplier non-compliance poses a major risk, especially for businesses dealing with MSMEs, small-scale farmers, informal traders, and some public institutions.
Exemptions
Government services such as court fees and licence payments do not qualify for exemption, meaning taxpayers must still obtain compliant eTIMS invoices from public offices. Timing differences between accounting records and eTIMS data also cause mismatches, while gaps in ERP or point-of-sale integrations worsen the problem.
Human error adds to the risk. Non-finance staff may omit buyer PINs, use incorrect item codes, or provide poor invoice descriptions, leading to failed validations.
KPMG warns that the risk profile has changed.
“For taxpayers, risk is no longer confined to computational errors, but now extends to process discipline, data integrity, supplier behaviour and system design,” the firm notes.
Getting ready for eTIMS
To prepare, KPMG advises taxpayers to carry out regular reconciliations between their accounting records and eTIMS data for sales, purchases, withholding tax, and imports. Businesses should embed eTIMS requirements into procurement and payment processes, train all staff involved in invoicing, and maintain clear audit trails for accruals, reversals, and credit notes.
They should also review supplier compliance, map exemptions carefully, and ensure that all income streams, including exempt ones, appear correctly in eTIMS.
KPMG concludes that early action offers a clear advantage.
“Taxpayers that align early will not only reduce exposure but also gain greater certainty and audit readiness,” the firm says.
The shift brings Kenya closer to countries such as Rwanda, Italy, Chile, and India, where electronic invoicing began with VAT and later expanded into income tax enforcement.