MPs propose exempting small traders from eTIMS compliance to ease burden

In a bid to ease the compliance burden for small traders, Members of Parliament have proposed exempting businesses with annual sales below Sh5 million from the Kenya Revenue Authority's (KRA) electronic Tax Invoice Management System (eTIMS).

The National Assembly Finance Committee, which made the recommendation, supports KRA’s goal of tracking the income and transactions of registered businesses.

However, the committee argued that eTIMS has failed to achieve this objective, as it has excluded many small businesses from working with large corporations.

The proposal comes as many large companies have started to drop small suppliers who cannot generate eTIMS-compliant invoices, a requirement under the law that mandates all suppliers, regardless of size, to issue electronic invoices.

The system was introduced as part of the Finance Act 2023 to curb tax evasion by ensuring that all business transactions are properly documented and reported to the KRA.

Under the committee’s recommendation, if approved by Parliament, large firms buying goods and services from small businesses would assume responsibility for producing the electronic invoices.

This proposal follows public consultations on the Tax Procedures (Amendment) Bill, 2024, which is currently before Parliament.

The Kenya Association of Manufacturers (KAM) expressed concerns about the practical difficulties of implementing eTIMS for small businesses, particularly farmers who do not maintain records or have Personal Identification Numbers (PINs) or bank accounts.

"This is because the eTIMS requirement is proving to be very difficult to implement, especially for farmers, many of whom do not maintain any records for their supplies and do not even have PIN numbers or bank accounts since their payments are generally made through M-Pesa if not in cash," KAM said in its submission to the Finance Committee.

KAM also argued that requiring businesses to use eTIMS for certain transactions, such as matatu or bodaboda services, is not practical.

The Finance Act 2023 introduced the eTIMS requirement to curb tax evasion by ensuring that all businesses issue electronic invoices.

However, the system has faced challenges in uptake, with more than 75 per cent of registered companies failing to implement it.

According to KRA’s internal data, only 120,000 of the 663,000 registered businesses had adopted eTIMS by June 2024, leaving 81.9 per cent non-compliant.

The system is designed to help the KRA track transactions between large companies and small suppliers, while also preventing corporations from inflating their expenses to reduce their taxable income.

Tax experts believe the low uptake of eTIMS is due to the lack of technical infrastructure and understanding among smaller businesses. The KRA had initially aimed for 51 per cent of businesses to be onboarded by June 2025.

Small and medium-sized businesses play a crucial role in Kenya's economy, providing the majority of employment in a country where the formal sector struggles to absorb new graduates.

In 2023, 85 per cent of new jobs were created in the informal sector, which accounted for 720,900 jobs, compared to 122,800 jobs in the formal sector. Analysts at PwC had earlier warned that small businesses may face difficulties in meeting eTIMS compliance when working with larger companies.

"It is noted that no consideration has been given to small businesses that deal with other businesses, as such, businesses may be challenged on raising eTIMS-compliant invoices or carrying out reverse invoicing," PwC said in a note.