Kenya's tax system is facing renewed scrutiny amid concerns that millions of informal sector workers remain outside the direct income tax net, leaving a relatively small group of formally employed citizens to shoulder much of the country's revenue burden.
Estimates indicate that about 15 million Kenyans working in the informal economy do not pay direct income tax, while roughly 3 million formal sector employees contribute through Pay-As-You-Earn (PAYE) deductions and other structured tax mechanisms. The disparity has reignited debate over fairness, tax compliance, and the sustainability of government revenue collection.
At the center of the discussion is the principle of horizontal equity, which holds that individuals with similar earning capacities should contribute equally to public finances. Critics argue that the current system falls short of this ideal, as formal sector workers are subject to automatic payroll deductions while many informal earners remain beyond the reach of direct tax assessment.
The government continues to rely heavily on PAYE and corporate income taxes because they are easier to administer and collect. Salaried employees have taxes deducted directly from their wages, ensuring a steady stream of revenue for the Treasury.
In contrast, the informal sector—which accounts for more than 83 percent of employment in Kenya—operates largely outside formal payroll systems. Businesses and workers in this segment often transact in cash, maintain limited financial records, and have irregular income patterns, making it difficult for the Kenya Revenue Authority (KRA) to accurately assess taxable earnings.
As a result, many informal sector participants benefit from public infrastructure, healthcare, education, security, and other government services funded largely by taxes collected from formal sector workers and registered businesses.
Tax experts say the challenge is not merely one of enforcement but also of policy design. Expanding the tax base without stifling small businesses remains a delicate balancing act, particularly at a time when the government is under pressure to raise revenue, manage public debt, and finance development programs.
The debate has intensified as authorities explore ways of increasing tax compliance through digital platforms, mobile money transactions, and improved business registration systems. Supporters of broader taxation argue that bringing more informal workers into the tax net would distribute the burden more fairly and strengthen government finances.
However, critics caution that aggressive taxation of small-scale traders and micro-enterprises could undermine livelihoods unless accompanied by measures that support business growth and simplify compliance requirements.