In a significant development set to reshape the landscape of Kenya’s tax regime, compliance will be a key provision of the Finance Act ‘23, in which the taxman must track stock and transactions of businesses effective today.

In the provision that amends Section 23 of the Tax Procedures Act 2015, Kenya introduced a groundbreaking electronic system for the issuance of electronic tax invoices and the maintenance of stock records —which requires businesses to issue electronic invoices— to track transactions online.

This will be among the most significant policy changes whose implications will be felt widely by companies and will hand the Kenya Revenue Authority (KRA) more visibility of transactions taking place in the economy and stock levels held by companies.

The move aims to streamline tax procedures, enhance transparency, and bolster efficiency in the taxation process.

“The commissioner may establish an electronic system through which electronic invoices may be issued and records of stocks kept for the purposes of this Act,” reads the Act.

This move underscores a decisive step toward modernising tax administration by leveraging cutting-edge technology to facilitate smoother interactions between businesses and regulatory authorities.

The new tax regime is faced with a challenging economic environment witnessed in the last financial year (2022/23), where taxpayers exhibited resilience in paying their taxes to support economic transformation. KRA recorded a revenue collection of Sh2.166 trillion for the period July 2022 – June 2023 compared to Sh2.031 trillion in the last financial year. KRA is expected to collect SH2.7 trillion with the new raft of changes.

In the Finance Act 2023, National Treasury Cabinet Secretary Njuguna Ndung’u has proposed tax administrative measures to ramp up collections and reduce the budget deficit by 4.4 per cent of gross domestic product (GDP) from an estimated 5.8 per cent. It is currently Sh849.2 billion.

The measures include a one-year tax amnesty that aims to nudge compliance, a proposal that builds on the success of the ongoing voluntary tax disclosure programme, which has managed to cumulatively enrol over 19,021 taxpayers with an estimated revenue collection of Sh10.4 billion. As of March 2023, the taxman had managed to collect Sh9.3 billion through the programme.

The amendments also target the codification of an electronic tax invoice management system and the requirement to account for withholding tax within 24 hours to expand the tax collection base by onboarding taxpayers previously not paying taxes.

Experts say that the digital tax system is working in Rwanda where the taxman has visibility of what are your stock levels on a daily basis and that it reduces the year-end stock adjustments meant to distort the taxable income. By enabling the issuance of electronic tax invoices, businesses will experience increased scrutiny but with reduced paperwork and administrative burdens.

This transition is expected to expedite the invoicing process, minimise the chances of errors, and lead to more accurate tax filings. Additionally, the digitisation of stock records will enhance accuracy in inventory management and reporting, reducing discrepancies that may arise due to manual record-keeping.
The implementation of the electronic tax invoice and stock record system is projected to foster transparency and accountability.

The electronic trail of transactions will make it easier for tax authorities to track financial activities and identify potential irregularities.

This heightened oversight is poised to discourage tax evasion and enhance revenue collection for government coffers.
Learning curve
As businesses gear up for the implementation of this provision, there may be an initial learning curve as stakeholders familiarize themselves with the electronic invoicing and record-keeping processes. However, the long-term benefits are expected to far outweigh any transitional challenges.
According to the new law, those who fail to comply with the Electronic Tax Invoice Management Systems (eTIMS) will be slapped with a stiffer fine of paying two times the value of tax due up from the current penalty of Sh100,000.