💡 Introduction
Starting a business in Kenya is exciting — but if you don’t understand your tax obligations from day one, you risk penalties, blocked PINs, and KRA compliance issues before your company even becomes profitable.
Whether you’re launching a side hustle, SME, online business, shop, restaurant, freelance service, or a fully incorporated limited company, the rules are the same:
Once you start earning taxable income, you MUST comply with the Kenya Revenue Authority (KRA).
This 2025 guide explains exactly what taxes apply to your new business, how to stay compliant, and which registrations you actually need.
1. Step 1 — Get the Right KRA PIN (Individual vs Business)
Every business must operate under a valid KRA PIN.
If you are a sole proprietor:
Use your individual PIN, then add the business obligations (VAT, TOT, PAYE, etc.) depending on activities.
If you are a company:
Use the company PIN fully.
Directors must also have active personal PINs.
2. Step 2 — Understand Your Tax Obligations (2025 Rules)
The taxes that may apply to your new business include:
A. Income Tax (Business Income)
For all businesses making profit.
Sole proprietors file:
- Income Tax – Individual Return (ITR) annually
- Upload a P&L / Accounts if turnover > KSh 5M
- Declare all business income (cash + M-PESA + bank)
Limited companies file:
- Income Tax – Company Return (IT2C)
- Must attach financial statements
B. VAT (Value Added Tax)
VAT becomes mandatory if:
✔️ Your annual turnover exceeds KSh 5,000,000,
or
✔️ You voluntarily choose to register.
VAT rate in 2025: 16%
If you register for VAT, you must:
- Issue eTIMS invoices
- File VAT monthly
- Reconcile eTIMS with Auto-Populated Return
C. Turnover Tax (TOT)
Applicable if:
- Your business turnover is KSh 1M to KSh 25M per year
- AND you are not VAT registered
TOT Rate (2025): 1%
Filed monthly via iTax.
D. Pay As You Earn (PAYE) – If you have employees
If you hire even one employee, you must:
- Register for PAYE
- Deduct PAYE monthly
- Remit by the 9th of every month
- Keep proper payroll records
E. Withholding Tax (WHT)
Applies when you pay:
- Rent
- Consultants
- Contractors
- Professional service providers
- Commission agents
- Directors
- Internet and communication services
WHT must be deducted and remitted monthly.
F. Digital Service Tax (DST)
If you earn income from:
- YouTube
- TikTok
- Influencer marketing
- Online consulting
- Freelancing (Upwork, Fiverr)
- Affiliate marketing
- Domain fees, hosting, digital ads
DST may apply for non-residents, but residents pay income tax instead.
G. Excise Duty
Only applies to businesses in specific sectors:
- Alcohol
- Cosmetics
- Betting & gaming
- Petroleum
- Confectionery
- Motor vehicles
- Telecommunications
3. Step 3 — Start Using eTIMS Immediately (2025 Rule)
Every business issuing invoices must now use eTIMS.
eTIMS is required if you:
✔️ Sell goods or services
✔️ Issue invoices
✔️ Serve corporate clients
✔️ Want your customers to claim VAT
✔️ Want to avoid penalties (up to KSh 1M)
Businesses exempt from eTIMS (2025)
Only a few categories such as:
- Small-scale farmers
- Informal transport providers
- Some informal traders
Everyone else must use eTIMS.
4. Step 4 — Keep Proper Records (Legal Requirement)
Under the Tax Procedures Act, you must keep records for 5 years:
- Sales invoices
- Purchase invoices
- eTIMS data
- Bank statements
- M-PESA statements
- Payroll records
- Import documents
- Stock/inventory records
Poor record-keeping = automatic penalties.
5. Step 5 — File and Pay Your Taxes on Time
Key KRA deadlines:
| Tax | Deadline |
|---|---|
| VAT | 20th monthly |
| TOT | 20th monthly |
| PAYE | 9th monthly |
| WHT | 20th monthly |
| Income Tax – Individuals | 30 June annually |
| Income Tax – Company | 6 months after financial year end |
Missing deadlines triggers penalties instantly.
6. Step 6 — Understand Your Banking & M-PESA Implications
KRA monitors:
- Lipa na M-PESA
- Till numbers
- Paybill
- Personal M-PESA
- Corporate bank accounts
- Mobile banking apps
If your deposits don’t match your declared income, expect:
- Queries
- Desk audits
- Assessments
7. Common Tax Mistakes New Businesses Make (2025)
| Mistake | Consequence |
|---|---|
| Using personal M-PESA for business | Causes KRA audit queries |
| Not registering for VAT after crossing 5M | Penalties + backdated VAT |
| Not using eTIMS | Fines up to 1M |
| Paying employees in cash | PAYE non-compliance |
| Filing Nil returns while running a business | Illegal filing + audit |
| Not reconciling VAT | Auto-Pop Return mismatches |
8. Frequently Asked Questions (FAQ)
Q1: Do I need a business permit before registering for taxes?
No. Tax obligations apply based on economic activity, not permits.
Q2: Do I need a company to start paying tax?
No — sole proprietors and freelancers pay tax too.
Q3: When must I register for VAT?
When your annual turnover exceeds KSh 5 million.
Q4: Can I run a business without eTIMS?
No — unless you fall under the official exemption list.
Q5: Do I need a tax agent?
Not required, but very helpful.
9. Conclusion
Starting a business in Kenya is a bold, exciting step — but tax compliance must be part of your foundation.
The earlier you understand your obligations, the easier it becomes to grow confidently and avoid penalties.