Treasury Cabinet Secretary John Mbadi has proposed a raft of changes to Kenya’s tax administration system, including new deadlines for filing tax returns, as the government seeks to strengthen compliance and give the Kenya Revenue Authority (KRA) more time to verify taxpayer information.
Under the proposals contained in the 2026/27 Budget Policy Highlights, Kenyans filing nil returns would be required to submit them within one month after the end of the year of income.
Individuals whose income is fully taxed at source, including salaried employees earning only employment income, would have four months to file their returns, while all other taxpayers would continue filing by June 30.
Explaining the proposed reforms before Parliament, Mbadi said the current filing timeline does not provide adequate time for scrutiny of returns before the start of a new financial year.
“Currently, the deadline for filing tax returns is June 30 of every year for all categories of income, which leaves no room for verification and validation of filed returns before the commencement of another financial year,” he said.
“To provide sufficient time for verification and validation of returns, I propose revisions to the timelines for filing individual income tax returns.”
The proposed changes are expected to affect millions of taxpayers, particularly those who file nil returns annually to remain compliant with KRA requirements.
The reforms form part of a broader strategy aimed at sealing tax loopholes and increasing government revenue. Among the measures proposed is the taxation of gains arising from offshore transactions involving assets located in Kenya.
Mbadi noted that some investors currently avoid paying tax by structuring transactions through foreign entities even when the underlying assets are in Kenya.
“Currently, gains arising from offshore transfers where the value of the transferred shares is derived from assets located in Kenya are not taxed,” he told lawmakers.
The Treasury is also targeting companies that retain profits for extended periods rather than distributing them to shareholders. According to Mbadi, some firms use this approach to delay the payment of dividend tax.
“When companies make profits, those profits should find their way back to shareholders within a reasonable time. Currently, some companies have been holding back their profits indefinitely simply to defer paying dividend tax. This is a loophole that needs to be addressed,” he said.
To address the issue, the government is proposing a minimum deemed dividend distribution threshold of 60 per cent of undistributed income.
The budget proposals further seek to update tax laws to reflect the realities of digital commerce and modern payment systems. Mbadi said existing legislation does not clearly define the tax treatment of certain software-related payments, interchange fees and merchant service charges.
“Rapid advances in technology have transformed the way businesses make payments, distribute software, and provide services across borders. However, the current Income Tax Act provisions do not clearly address the tax treatment of certain payments,” he said.
The proposed amendments would clarify the taxation of royalties, management fees and professional service payments, while reducing opportunities for revenue leakage.
The government is also proposing withholding tax on winnings from gambling, lotteries and prize competitions, arguing that earnings from such activities should be taxed like any other form of income.
“Gambling activities have grown significantly in recent years, particularly through digital platforms. While these are legitimate activities, winnings from gambling are income, and like any other income, they should be taxed,” Mbadi said.
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