The Kenya Revenue Authority (KRA) has removed 475 officials—74% of its VAT approval staff—and blacklisted 4,434 traders linked to a VAT refund fraud scheme that’s bleeding the exchequer of an estimated Sh2.5 billion monthly, or Sh30 billion annually.

This massive crackdown follows an internal audit that exposed widespread abuse of the VAT refund system through fictitious transactions and collusion between rogue traders and compromised KRA staff.

Audit Reveals Extent of Fraud

At the heart of the fraud is the “Missing Trader Scheme”, a complex VAT evasion tactic where companies create fake invoices to simulate business activity—without delivering any goods or services. These fake transactions are used to claim refunds from the tax authority, draining billions from the public purse.

According to the KRA audit:

  • 2,080 firms issued Sh19.69 billion in fake invoices with a VAT impact of Sh2.94 billion, yet filed no VAT returns since July 2024.

  • Their supposed buyers claimed Sh13.64 billion worth of purchases, leading to a potential VAT loss of Sh2.14 billion.

  • 2,345 taxpayers filed returns between January and March 2025, but failed to remit Sh2.54 billion in VAT payments.

  • Some traders disappeared after charging customers VAT, while others threatened KRA officers when confronted.

Reducing the Approval Pool

In response, KRA has reduced the number of officers authorized to approve VAT obligation applications from 645 to 170, a move to tighten internal controls.

“This is to improve oversight and reduce fraudulent registrations,” the authority said in its internal report.

Physical verification checks and more stringent taxpayer vetting is now being done at the registration stage.

Special Measures to Bust Fraud Rings

KRA has also introduced a digital control mechanism: the ‘VAT Special Table’, a blacklist within the VAT return system that prevents non-compliant or suspect firms from filing returns. As of May 2025:

  • 20,981 inactive taxpayers are being targeted for bulk deregistration.

  • Others are being vetted for possible suspension or dormancy status.* Once on the ‘Special Table’, a taxpayer cannot file VAT returns and any attempt will result in a warning message saying the PIN is “under review for VAT compliance irregularities.”

The flagged taxpayers are:

  • Non-filers or nil filers with suspicious refund claims

  • Traders not complying with e-TIMS (electronic tax invoice management system) rules

  • Firms that have not remitted VAT for over six months despite enforcement efforts

Sector-Specific Fraud Networks

The audit also uncovered fraud schemes in sugar importation and government supply contracts, including those with Kenya Power. One group of companies owes KRA Sh1.1 billion, with some of the implicated officers reportedly receiving threats from the companies.

“Efforts to collect the amount have elicited threats and innuendos, clearly showing lack of commitment to comply with the law.”

Revenue Impact and Policy Shifts

The VAT fraud has significantly impacted revenue performance. Data shows:

  • VAT collections dropped 4.3% in the six months to December 2024, the first such decline since the COVID-19 pandemic.

  • Total VAT receipts fell from Sh317.8 billion in H2 2023 to Sh304.1 billion in the same period in 2024.

  • In contrast, January 2025 saw a record Sh34.55 billion in VAT collections, credited to the rollout of auto-populated VAT returns that improved compliance.

The National Treasury now targets Sh177 billion in additional revenue in the next fiscal year through sealing such systemic leaks.