💡 Introduction

Kenya’s tax landscape has changed drastically in the last few years — especially with eTIMS, auto-populated VAT returns, and Finance Act 2025 tightening compliance rules.

And here’s the truth:

KRA penalties are now easier to trigger, harder to reverse, and costlier than ever before.

Whether you’re an individual, SME owner, employer, or a company director, understanding how penalties and interest work can save you thousands of shillings — and spare you from compliance headaches.

This guide breaks down every penalty under the Tax Procedures Act (TPA), VAT Act, Income Tax Act, and current KRA practices — using simple Kenyan examples.

1. Legal Foundation for Penalties in Kenya

The main laws governing penalties and interest are:

📘 Tax Procedures Act (TPA), Cap 469B

Covers return filing, payment deadlines, enforcement, interest rates, records, audits.

📘 VAT Act, 2013 (Revised 2024)

Covers VAT invoice requirements, eTIMS compliance, input/output tax obligations.

📘 Finance Act 2025

Updated penalties for digital tax, eTIMS non-compliance, VAT automation and payroll compliance.

📘 Income Tax Act (Cap. 470)

Covers PAYE, Withholding Tax, corporate income tax deadlines, CGT.

Together, these laws guide every KRA enforcement action.

2. Penalties for Late Filing of Returns (2025 Rates)

KRA charges different penalties depending on the type of tax return.

A. Income Tax – Individuals (ITR)

Late filing penalty: KSh 2,000
If turnover > KSh 5M → minimum KSh 20,000

Example:
If you file your 2024 return on 5 July 2025 → penalty = KSh 2,000.

B. Income Tax – Companies / Partnerships

Late filing penalty:
- KSh 20,000 or
- 5% of the tax due, whichever is higher.

C. VAT Returns

Penalty: KSh 10,000 or 5% of tax due, whichever is higher.
Interest: 1% per month.

D. PAYE Returns

Late filing penalty: KSh 10,000 or 25% of tax due (whichever is higher).
This is one of the harshest penalties.

E. Withholding Tax (WHT)

Penalty: KSh 10,000 or 5% of the tax due.

F. Digital Service Tax (DST)

Late filing penalty: KSh 20,000 for individuals; KSh 50,000 for corporates.

G. Excise Duty Returns

Penalty: KSh 10,000 or 5% of tax due.

3. Penalties for Late Payment of Tax

This applies to ALL tax types.

💰 Late Payment Penalty

5% of the unpaid tax

💰 Interest

1% per month
Compounded monthly until payment is fully settled.

Example:
You owe VAT of KSh 100,000.
You pay 3 months late.

Penalty: 5% × 100,000 = KSh 5,000
Interest: 1% × 3 months × 100,000 = KSh 3,000
Total extra cost: KSh 8,000

4. Penalties for Missing or Incorrect Records (eTIMS & VAT)

The VAT Act and the new eTIMS rules significantly raise compliance requirements.

⛔ Failure to Use eTIMS (2025 rules)

Under TPA & Finance Act 2025:

Fine up to KSh 1 million, or
Imprisonment, or
Both.

⛔ Failure to Issue an eTIMS Compliant Invoice

Input VAT will be rejected.
Supplier can be listed on the VAT Special Table.
Business may be blocked from issuing invoices.

⛔ Using a Non-Registered eTIMS Device

Fine up to KSh 500,000.

⛔ Incorrect invoices (wrong PIN, wrong tax rate)

Trigger audit adjustments.
Input VAT claims automatically denied by the auto-populated VAT return.

5. PAYE Penalties (Employers)

Employers face strict rules under Income Tax and TPA.

📌 Failure to Deduct PAYE

Penalty: 25% of the tax not deducted.
PLUS full tax still payable by employer.

📌 Failure to Remit PAYE

Penalty: 5% of tax due.
Interest: 1% per month.

Example:

You didn’t remit PAYE of KSh 50,000 on time.
Penalty = KSh 2,500
Interest (2 months) = KSh 1,000
Total extra = KSh 3,500

6. VAT-Related Penalties (2025 Rules)

These are now automated via eTIMS + Auto-Populated Return system.

❗ Invalid Input VAT Claim

Triggered when:

Supplier isn’t on eTIMS
Supplier is in VAT Special Table
Supplier’s PIN is inactive/dormant
Invoice older than 6 months
Invoice not transmitted to KRA

Penalty: VAT claim disallowed + possible audit.

❗ Failure to Declare Credit Notes

Required for both supplier and purchaser.
Auto-populated VAT return rejects mismatched declarations.

❗ Incorrect VAT Invoice Details

Locked fields include:

PIN
Invoice number
Date
Taxable amount

Mismatches = forced adjustment + risk of penalty.

7. Withholding Tax Penalties

1. Failure to Deduct WHT

Penalty: 10% of the tax not deducted.

2. Failure to Remit WHT

Penalty: 5% of tax due.
Interest: 1% per month.

3. Filing Errors

Wrong PIN = WHT not recognized.
Wrong rate = under-deduction penalty.

8. Capital Gains Tax (CGT) Penalties

CGT is due before transfer of land or shares.

Late Filing of CGT

Penalty: KSh 2,000 (individuals)
Or KSh 20,000 (corporates)
Or 5% of tax due, whichever is higher.

Late Payment

5% penalty
1% interest per month

9. Tax Waivers, Penalty Relief & Amnesty

Under Section 89 of the TPA, KRA may waive:

Penalties
Interest

Conditions:

Must be fully compliant going forward
Must have no outstanding returns
Must provide valid grounds (illness, misfortune, natural disaster, system error)

When KRA typically approves waivers:

Payroll errors (first-time)
VAT or WHT reconciliation issues
System malfunction (iTax/eTIMS)
SME hardship cases
During presidential amnesty periods

10. How to Avoid KRA Penalties (Pro Tips)

1. Use a Monthly Tax Calendar

Set reminders for the 9th, 20th, and monthly deadlines.

2. Automate Compliance

Use:

eTIMS
Accounting software
Standing orders for tax payments

3. Confirm Supplier PINs Before Purchase

Avoid invalid VAT claims.

4. Reconcile eTIMS with VAT Return Every Month

As per KRA: “If it’s not in eTIMS, it’s not in VAT.”

5. Do a Year-End Tax Health Check

Helps spot underpayments early.

11. Frequently Asked Questions (FAQs)

Q1: Can penalties be reversed?

Yes — through a penalty waiver request under Section 89, if justified.

Q2: Can KRA waive interest?

Yes, but only in special circumstances.

Q3: What is the worst tax penalty?

Failure to use eTIMS: up to KSh 1,000,000 fine or imprisonment.

Q4: Does filing late affect my TCC?

Yes — KRA requires all returns filed on time for tax compliance certificate approval.

Q5: Can KRA audit me for one mistake?

Yes — mismatches now trigger automated desk audits.

12. Conclusion

KRA penalties in 2025 are more automated, more predictable — and more expensive.
But with the right systems, reminders, and compliance habits, you can avoid almost all of them.

If you’re unsure about your compliance status, need reconciliation support, or want help preparing for a KRA audit:

👉 Contact Ushuru.com for expert tax support today.