Kenya’s tax system is entering a new phase. From 2026, businesses will no longer file income tax returns based only on their internal records. Instead, the Kenya Revenue Authority will automatically validate declared income and expenses against electronic data already in its systems.
This change is driven by the expanded use of eTIMS, the Electronic Tax Invoice Management System, and amendments introduced through recent Finance Acts and tax regulations. While eTIMS has been discussed for some time, the 2026 validation marks the point where it directly affects how much tax a business pays.
For many businesses, this will be the most significant compliance shift in years.
What Exactly Has Changed
Previously, a business could file its income tax return by declaring total income and expenses based on its books of accounts. KRA could later audit the return, but the filing itself was largely accepted at face value.
From 2026 onwards, this approach changes.
KRA will now validate income and expenses automatically at the point of filing. The figures declared in the return must match what KRA already has from digital sources, especially eTIMS invoices and withholding tax data.
If the figures do not match, the system will either reject the return or adjust the taxable income by disallowing unsupported expenses.
The Central Role of eTIMS
eTIMS is the system through which businesses issue electronic tax invoices that are transmitted directly to KRA. Each invoice captures key information including the seller PIN, buyer PIN, value of the transaction, VAT where applicable, and date.
Under the new validation rules:
- Income declared must align with sales captured through eTIMS and related systems
- Expenses claimed must be supported by valid eTIMS invoices issued by suppliers
- Invoices that exist only on paper or informal receipts will not be sufficient
In simple terms, if KRA cannot see the transaction in its system, it will treat it as if it did not happen for tax purposes.
What This Means for Income Reporting
Businesses will no longer have room to estimate or adjust income figures at year end. Sales declared in the income tax return must reconcile with:
- eTIMS sales data
- VAT returns where applicable
- Withholding tax income reported by customers
- Import records for businesses dealing with imports
Any mismatch raises an immediate red flag. This forces businesses to ensure that all income is invoiced correctly and consistently throughout the year, not corrected later during return filing.
What This Means for Expense Claims
The biggest impact will be felt on expenses.
Going forward, most business expenses will only be deductible if they are supported by a valid electronic tax invoice generated through eTIMS. If an expense does not have an eTIMS invoice that KRA can trace, it risks being disallowed.
This applies even where the expense was genuinely incurred.
Common problem areas include:
- Suppliers who are not registered on eTIMS
- Informal sector purchases
- Small service providers issuing manual receipts
- Historical expenses recorded without electronic documentation
When expenses are disallowed, taxable profit increases, which directly increases the tax payable.
Legal Basis for the Changes
The validation process is supported by amendments to the Tax Procedures Act and the Electronic Tax Invoice Regulations. These laws give KRA authority to require electronic invoicing and to restrict deductibility of expenses that are not supported by compliant documentation.
While some exemptions exist for specific transactions such as certain imports, statutory deductions, and prescribed payments, these exceptions are narrow and must be clearly documented.
The general rule is now clear. No electronic trail means no tax deduction.
Practical Impact on Kenyan Businesses
Higher Tax Exposure
Businesses that do not adapt may find that a large portion of their expenses are disallowed, leading to unexpectedly high tax bills.
Pressure on Supplier Relationships
Businesses will increasingly demand eTIMS compliant invoices from suppliers. Those unable or unwilling to comply may lose business.
Stronger Record Keeping Requirements
Bookkeeping must now align with KRA systems, not just internal records. Reconciliations between accounting software, eTIMS data, and tax returns become essential.
More Predictable Audits
While compliance pressure increases, businesses that keep clean electronic records may face fewer manual audits since much of the verification happens automatically.
Who Is Most Affected
- Small and medium enterprises
- Businesses that rely heavily on informal suppliers
- Companies with weak accounting systems
- Businesses that previously adjusted figures at year end
Larger businesses with structured systems may adapt more easily, but they are not exempt from the rules.
How Businesses Should Prepare Now
Preparation should not wait until filing season.
Key actions include:
- Ensuring eTIMS is fully implemented and used consistently
- Educating suppliers on issuing compliant invoices
- Regularly reconciling books with eTIMS data
- Reviewing expense categories most likely to be disallowed
- Seeking professional guidance where transactions are complex
Early preparation reduces the risk of shocks when filing returns for 2025 income in 2026.
Why KRA Is Doing This
From KRA’s perspective, the objective is straightforward.
- Reduce tax evasion
- Improve accuracy of returns
- Minimise disputes and lengthy audits
- Increase efficiency through automation
This aligns with a global trend where tax authorities rely more on real time digital data rather than after the fact audits.
Final Thoughts
The new eTIMS income and expense validation is not just a technical update. It fundamentally changes how tax compliance works in Kenya.
Businesses are moving from a trust based reporting system to a data verified system. Those who adapt early will operate more smoothly and predictably. Those who delay risk higher taxes, rejected returns, and compliance challenges.
For Kenyan businesses, the message is clear. Digital tax compliance is no longer optional.
