Treasury CS Mbadi proposes new filing deadline for nil return taxpayers

Treasury Cabinet Secretary John Mbadi has proposed sweeping changes to Kenya's tax administration system, including new filing deadlines that would require taxpayers with nil returns to submit their annual declarations just one month after the end of the tax year.

The proposal, contained in the 2026/2027 budget policy highlights, seeks to give the Kenya Revenue Authority (KRA) more time to verify and validate tax returns before the start of a new financial year.

Explaining the rationale behind the move, Mbadi told Parliament on Thursday afternoon that the current system 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 said.

“To provide sufficient time for verification and validation of returns, I propose revisions to the timelines for filing individual income tax returns.”

Under the proposed changes, taxpayers filing nil returns would be required to submit them within one month after the end of the year of income.

Individuals whose earnings are fully taxed at source, including salaried employees earning employment income only, would be required to file their returns within four months after the end of the year of income, while all other taxpayers would continue filing by June 30.

The proposed changes are expected to affect millions of Kenyans who currently file nil returns annually as part of their tax compliance obligations.

The filing reforms are part of a wider package of tax measures aimed at plugging revenue leakages and expanding the government's tax base.

Among the notable proposals is a plan to tax gains arising from offshore transactions involving assets located in Kenya.

CS Mbadi noted that the current legal framework allows some transactions involving Kenyan assets to escape taxation when structured through foreign entities.

"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.

To close the loophole, the Treasury CS proposes amendments to ensure that gains arising from the transfer of Kenyan assets attract tax regardless of where the transaction is executed or where the beneficial owners are based.

The government is also targeting companies that retain profits for prolonged periods instead of distributing them to shareholders.

According to Mbadi, some firms have been using indefinite retention of profits as a means of delaying 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.

The budget consequently proposes the introduction of a minimum deemed dividend distribution threshold of 60 per cent of undistributed income, a move aimed at discouraging companies from retaining earnings solely for tax planning purposes.

The Treasury also seeks to modernise tax laws to keep pace with technological advancements that have transformed cross-border payments, software distribution and digital commerce.

Mbadi said ambiguities in existing legislation had created uncertainty around the taxation of 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 definitions of royalties and management or professional fees to provide a clearer legal basis for taxation of such transactions while reducing opportunities for revenue leakage.

The government has also set its sights on the country's growing gambling industry, arguing that winnings from betting and related activities should be treated like any other taxable 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.

The budget therefore proposes the introduction of withholding tax on winnings from gambling, lotteries and prize competitions.