IMPACT OF KRA’S VALIDATION OF INCOME AND EXPENSES IN INCOME TAX RETURNS: WHAT YOU NEED TO KNOW
Introduction
The Finance Act 2023 introduced mandatory electronic tax invoice management system (eTIMS) by an amendment to section 23 of the Tax Procedures Act, Cap 469B of the Laws of Kenya and section 16 of the Income Tax Act, Cap 470 of the Laws of Kenya to disallow deductions for expenses lacking an eTIMS generated invoice.
On 7th November 2025, the Kenya Revenue Authority (KRA) issued a Public Notice announcing that effective 1st January 2026, income and expenses declared on income tax returns will be validated. This validation will apply to both individual and non-individual taxpayers upon submission of the 2025 year of income/accounting period returns via the iTax platform.
The validation will be conducted using data derived from TIMS/eTIMS invoices, withholding income tax gross amounts and import records from Customs systems. This is a shift towards data-driven tax administration and has far-reaching implications for taxpayers’ compliance obligations, risk exposure and record-keeping practices.
Although exceptions exist under Section 23A of the Tax Procedures Act and the Tax Procedures (Electronic Tax Invoice) Regulations, 2024; they are limited and may be applied strictly and in exceptional circumstances.
The Implications of the Notice on Taxpayers
1. Increased Scrutiny of Declared Income and Expenses This is a departure from Kenya’s self-declaration on income. Declared income and expenses will now be cross-checked against KRA’s internal and third-party data systems. As such, expenses unsupported by eTIMS invoices may be disallowed for tax purposes, potentially resulting in higher taxable income and additional tax assessments.
2. Tax Compliance Certificate The validation exercise has tightened the requirements for obtaining and retaining a Tax Compliance Certificate (TCC). As such, taxpayers who have not undertaken eTIMS registration or have unresolved variances, will be unable to get a TCC until the issues are resolved. The validation exercise elevates the TCC eligibility from a filing and payment-based confirmation to a substantive accuracy test of returns, making proper eTIMS compliance, accurate reporting and reconciliation of third-party data.
3. Greater Reliance on TIMS/eTIMS Invoices KRA emphasized that all declared income and expenses must be supported by valid electronic tax invoices, correctly transmitted and linked to the buyer’s PIN, where applicable.
4. Heightened Risk of Additional Assessments and Penalties Where discrepancies are identified, taxpayers may face additional tax assessments, penalties for under-declaration, delays in payment of refunds and increased likelihood of tax audits and investigations. This particularly affects taxpayers who have historically relied on manual invoices, informal suppliers or estimates when preparing their income tax returns.
5. Impact on Cash Flow and Business Operations Businesses that fail to align their internal accounting records with KRA systems may experience cash flow pressure, especially where expense deductions are denied. Small and medium enterprises (SMEs) may be disproportionately affected if their suppliers are not fully compliant with the eTIMS requirements.
6. Greater Accountability Across the Supply Chain The notice indirectly places pressure on taxpayers to transact only with compliant suppliers, as non-compliant invoices do not reflect in KRA systems and shall not be recognized for purposes of having expenses deducted. This creates a compliance chain where one party’s failure can adversely affect another’s tax position.
Measures to Comply and Mitigate Risks
To comply with the new expenses validation framework and mitigate associated risks, taxpayers should take proactive steps such as:
1. Reconcile Tax Returns with KRA Data Sources Before filing income tax returns, taxpayers should reconcile the declared income and expenses against the TIMS/ eTIMS schedules, withholding tax certificates and import and customs records, where applicable.
2. Strengthen Record-Keeping and Documentation Taxpayers should maintain complete, accurate and up-to-date electronic records, ensuring that all invoices meet the eTIMS requirements and are properly transmitted with correct buyer PIN details.
3. Engage Compliant Suppliers and Service Providers Businesses should conduct due diligence on the suppliers they wish to buy from, to ensure they are eTIMS compliant. Contracts and procurement policies should require issuance of valid electronic tax invoices as a condition for payment.
4. Request and Review TIMS/ eTIMS Schedules Regularly Taxpayers should obtain their TIMS/ eTIMS schedules of annual income and expenses from their designated account managers and review them periodically to identify discrepancies early.
5. Seek Prior Professional Tax Advice Given the technical and system-driven nature of the validation process, taxpayers should engage tax professionals to review their filings, manage exemptions and respond promptly to KRA queries; to minimize risk of assessments by the Commissioner, tax audits or the expense deduction being rejected.
Conclusion
The validation of income and expenses represents a strategic move by KRA towards real-time, data-backed tax compliance. While it increases the compliance burden on taxpayers, early preparation, system alignment and accurate record management will significantly reduce risk and promote smoother engagement with the tax authority in the 2026 filing cycle and beyond.
Though this requirement affects majority of the taxpayers. Every taxpayer should review the exemption requirements under section 23A of the Tax Procedures Act and Regulation 11 (3) and (4) of the Tax Procedures (Electronic Tax Invoice) Regulations, 2024 to know whether they qualify for exemptions and apply to the Commissioner where need be; to avoid the repercussions of non-compliance.