Free riders? How policy loopholes leave informal sector untaxed

For an economy majorly supported by the informal sector, economists feel that the government is doing very little to even out the tax burden. 

The taxman largely relies on pay-as-you-earn (PAYE) and corporate income tax, rather than excise duty, to feed the Exchequer. 

This is while there are 18.1 million informal sector workers – and associated businesses – that the government seems unable to rope into the tax net. 

One of the arguments presented by seasoned economist Dr Patrick Muinde is the claim that expanding the tax base has no concrete backing. 

His assertion is simple: the tax base needs economic backing. 

“When you talk about expanding the tax base, it must be based on economic activity. People do not pay taxes. What pays taxes is the economic activity they engage in,” he said. 

Muinde faulted the country’s tax regime, saying it overburdens formal workers and leaves the rest to enjoy government services for free.

Additionally, there is little in the country’s tax policy that addresses how the government intends to transform the economy from informal to formal. 

Data from the Kenya National Bureau of Statistics (KNBS) 2026 Economic Survey Report shows wage employment (formal jobs) stood at 3.3 million in 2025. These are 1.1 million jobs in the public sector and 2.2 million in the private sector. 

The formality of these jobs is what makes it easy for the Kenya Revenue Authority (KRA) to collect corporate tax and PAYE, among other statutory deductions such as the housing levy, National Social Security Fund (NSSF) and the Social Health Insurance Fund (SHIF). 

From the KNBS data, however, there are 18.1 million informal sector workers. This workforce represents 83.8 per cent of the country’s job market.

However, experts argue that the kind of efforts being implemented by the government to tax this segment of workers are not commensurate with the size of the economy they control. 

“The tax policy for a very long time has been supporting a formal [economy] set up. The data tell us we are dealing with a very informal economy,” said Muinde. 

Macred Ochieng, a finance and risk management expert based at KCA University, points out that the country has for long allowed the informal economy to enjoy near tax-free operations, which punishes the formal sector. 

“I want to fault KRA and the National Treasury for this. I am very sure some mechanisms can be put in place to ensure we are all paying taxes,” he said during a discussion on the Finance Bill 2026 held at the university. 

He gave an example of the boda boda industry in which he said the government can collect Sh250 million from just a Sh100 levy imposed on each of the roughly 2.5 million operators. 

“That can be replicated on the matatu and mama mboga. These people enjoy government services, but they do not feel the pressure to pay taxes, and the National Treasury has allowed it,” he said. 

One way of ensuring this sector pays its fair share of taxes, he said, is to open tax shops or agencies in their areas of operations through third parties. 

“We can take an area like Githurai and make it a tax meeting point. Every boda boda and mama mboga will have to report there and pay their taxes, even if it is a presumptive tax,” he said. 

KRA Assistant Manager Marketing and Communication Corazon Aquino, however, noted that the taxman already has almost similar initiatives through Ushuru Mashinani (taxation in the grassroots), where some trained individuals act as agents. 

“This is despite KRA being in all 47 counties and Huduma Centres and also being online,” she said. 

She said KRA is also working with grassroots associations, such as boda boda chamas at the stage level, as a way of softening the tax message. 

She said if the message comes from the association’s leadership, it will have more weight due to familiarity, unlike when KRA imposes the same. 

“If someone from the chama speaks, they listen,” she said.

Aquino explained that this strategy is part of the formalisation of the economy, saying it does not always have to be paperwork and computers. 

“In reality, when you go to the boda boda stage, they already have their own structure – a chairman, secretary and so on.  We have become deliberate about fixing ourselves in their ecosystem,” she said. 

Aquino noted that the introduction of eTIMS (electronic tax invoice management system) is also meant to regularise operations of informal businesses. She pointed out that while some businesses are lamenting over its implementation, the thought behind it is that most of these informal enterprises trade with large taxpayers. 

“So, we brought it to eTIMS to make their transactions visible,” she said. 

The National Treasury in its Budget Policy Statement 2026 notes that for personal income tax (PIT) to function effectively in this role, the tax burden must be shared broadly and applied consistently across income earners. 

The document states that where compliance is uneven and concentrated on a narrow group of taxpayers, the redistributive role of PIT is weakened, and confidence in the tax system is undermined. 

“In Kenya, PIT performance has been characterised by strong compliance among formal sector employees and persistently low compliance among the self-employed. This imbalance has resulted in a system where income visibility, rather than ability to pay, largely determines tax contribution,” the policy document says. 

It adds that as a consequence, formal sector taxpayers bear a disproportionate share of the PIT burden, while a large and economically active self-employed population remains outside effective taxation. 

“This outcome is neither equitable nor sustainable and places continued pressure on a limited segment of compliant taxpayers,” the document reads.