Treasury Cabinet Secretary John Mbadi has unveiled a series of tax reforms that could significantly change how millions of Kenyans file their tax returns, as the government seeks to strengthen tax administration and seal revenue leakages.
Speaking in Parliament while presenting the 2026/2027 budget policy highlights on Thursday, Mbadi proposed new timelines for filing income tax returns, arguing that the current system does not provide the Kenya Revenue Authority (KRA) with enough time to verify and validate returns before the start of a new financial year.
Under the existing framework, all taxpayers are required to file their annual returns by June 30. However, Mbadi said the arrangement leaves little room for scrutiny of submitted returns.
“Currently, the deadline for filing tax returns is 30th June 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 told lawmakers.
To address the challenge, the Treasury is proposing a differentiated filing schedule based on taxpayer categories.
If approved, individuals filing nil returns will be required to submit their annual declarations within one month after the end of the year of income. Taxpayers whose income is fully taxed at source, including salaried employees who earn only employment income, will have up to four months after the end of the year of income to file their returns.
All other categories of taxpayers will continue filing returns by June 30.
The proposed changes are expected to affect millions of Kenyans who currently submit nil returns annually as part of their tax compliance obligations.
The filing reforms form part of a broader package of measures aimed at improving tax collection and expanding the country’s revenue base.
Among the key proposals is a plan to tax gains arising from offshore transactions involving assets located in Kenya. According to Mbadi, some transactions currently escape taxation when they are structured through foreign entities despite deriving value from Kenyan assets.
“Currently, gains arising from offshore transfers where the value of the transferred shares is derived from assets located in Kenya are not taxed,” he said.
The Treasury is therefore proposing amendments that would ensure gains arising from the transfer of Kenyan assets are taxed regardless of where the transaction takes place or where the beneficial owners are based.
The government is also seeking to address what it describes as abuse of profit retention by some companies. Mbadi noted that certain firms have been holding onto profits for extended periods instead of distributing dividends to shareholders, effectively delaying the payment of dividend taxes.
“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 curb the practice, the Treasury is proposing the introduction of a minimum deemed dividend distribution threshold of 60 percent of undistributed income. The measure is intended to discourage companies from retaining earnings solely for tax planning purposes.
The reforms also seek to modernise Kenya’s tax laws in response to rapid technological changes that have transformed digital commerce, software distribution and cross-border payments.
Mbadi said existing legislation does not clearly define the tax treatment of certain software-related payments, merchant service charges and interchange fees, creating uncertainty and opportunities for tax avoidance.
“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 noted.
The proposed amendments would clarify the definitions of royalties and management or professional fees, providing a clearer legal framework for taxation while reducing opportunities for revenue leakage.
The Treasury has also turned its attention to Kenya’s rapidly expanding gambling industry. Mbadi argued that winnings from betting, lotteries and prize competitions should be treated as taxable income just like earnings from other sources.
“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,” he said.
Consequently, the government is proposing the introduction of withholding tax on winnings from gambling, lotteries and prize competitions.
The proposed measures are expected to be debated by Parliament as part of the Finance Bill and broader budget implementation process.
