Evolution of the Kenyan Tax Regime: Pre-Colonial Era to Present Day


Taxation plays a critical role in modern states by enabling provision of public services (roads, justice system, defense, healthcare and education among others), spur economic growth, harmonizing unfavorable competitive environments and protection of the population’s well-being.

Kenya thrives as an economic powerhouse in East Africa and the home of innovations popularly referred to as the Silicon Savannah. Kenya’s population according to World Bank data stands at ~52M people; with 85% of the population below the age of 35, and the middle-class constituting ~44.9% of the total population.

To fund its operations and development, Kenya generates its income from two main sources:

  • Tax revenue: Taxes on goods and service; and income Tax
  • Non-Tax revenue: Interest, dividends and rents

Tax and non-tax revenues collected by the Kenyan government expressed as a percentage of GDP has historically fluctuated between 16% and 22%; and averages at about 19%.

According to OECD report on revenue statistics 2021, approximately 51% of the tax revenue collected in Kenya comprised taxes on goods and services followed by, taxes on income, profits and capital gains at 44% and finally 5% for social security contributions. Non-Tax revenue comprised approximately 2% of the total tax revenue collected.

To understand how the Kenyan taxation system has developed to date, it is prudent enough to appreciate how far it has come and how the future looks like. The categorization has been divided into past, present and future of taxation; and explained in detail below.

Past: Development of Taxation

Kenyan taxation structure has developed overtime and this is attributed to its adaptability to economic developments for the last two decades. To appreciate the past development in tax law and how it has been used as a tool to transform the Kenyan economy from subsistence/socialistic to a capitalistic one, it is prudent to study how the colonial played an important role in the transformation of taxation law.

1. Pre-Colonial era/Agrarian Revolution: In the height of pre-colonial era, Kenyan economy was purely a socialistic one in the sense that property was communally owned by all members of a particular social set up. In addition, Kenya was made up of multifarious tribal-based societies each with its own geographical and sociological background.

The applicable taxes were tithe, whereby upon amassing of wealth in form of harvests, part of it was required to be submitted to the community leaders who then would use the harvest in future to assist those who didn’t have enough property to sustain them.

The principles and systems of taxation that existed in most African kingdoms during this period were informal.

The Arabs at the coastline of East Africa who came first before the colonial masters, were trading on ivory and slaves. They remained along the coastline of East Africa for business expediency, to facilitate trade between the hinterland and Arab traders who mainly came from the sultanate of Oman

The sultanate applied a system of taxation that was a mixture of Islamic law as well as trade tax in order to maintain their presence at the coast.

2. Colonial Period/Industrial Revolution: Kenya’s taxation system and policy started in 1897 with the British taking over the Kenyan territory together with its existing balance of taxation left by the Arabs and Portuguese. The tax inherited was the capitation tax payable per head of slave exported and customs revenue shared equally between the Arabs and Portuguese.

During this era, the British colonial tax policy developed mostly on the ground that they needed to support its own economy by creating foreign markets and sources of raw materials for its industries, thus obtaining maximum gains with minimum input. 

The British therefore introduced a tax law in Kenya through;

  • Hut and Poll tax (crude wealth taxes that only served as a proxy for property rating to rural areas) by completely ignoring tax principles. The reason for the application of this tax was to pull the African population into the capitalistic labor market.

The introduction of hut and poll tax faced fierce criticisms for its ill intentions. For instance, the wealthier you            were the more you paid in tax. This led to a commissioner appointed to investigate the allegations of abuse and        distress in the collection of African and non-African direct taxes. The recommendations from the commissioner        were as below;

    • Native taxation system required amendment by an extension of the system of grading, the reduction of the payment because of extra huts and the raising of the taxable.
    • The graduated and non-native poll tax and education taxes should be abolished.
    • Traders and professional licenses should be modified and levy on official salaries should be reduced by half.
    • Finally, to guard against uncertainty of the yield from the proposed income tax in its early years, and from native hut and poll tax to allow a gradual introduction of the proposed economies.
  • Land Tax: The crown land bill presented in 1908 proposed the levying of a graduated land tax on individual holdings as a sound basis for land policy in East Africa. The bill provided that whenever any individual or corporation held more than 50,000 acres, the land tax would be increased to four times the amount that would otherwise be payable. However, the crown land ordinance in 1915 conceded to settlers’ demand by deleting the provisions for land taxation. The land policy shaped land policy throughout the region. It helped in:


    • Emergence of a land market by legalizing the free transfer and mortgaging of the land.
    • It allowed land leases to be granted for 99 years.
    • Rent reassessments at one percent and two percent of the unimproved value of the land during the 33rd and 66th year respectively.
    • Promoted agriculture and urbanization that served as the catalyst for defining individual and private family rights to land in terms that are more exclusive.

The 1915 Ordinance failed in one important respect; although occupiers were required to make improvements          to  the land within a specified period and to maintain such improvements after that, it did not include any                    provisions against speculative accumulation of land.

  • Graduated Personal Tax: It was introduced in 1933 and applied for the first time in 1934 at rates graduated according to the taxpayer’s income with certain amendments. The graduated personal tax emerged as a result of the rise in demand for wage labor and rapid urbanization that took place back then. The graduated tax was a non-racist tax that was applied to all races without discrimination.

The graduated tax was fully enforced with effect from 1st January 1958 before independence with the                        enactment of personal tax ordinance of 1957.

  • Income Tax: This tax was introduced in Kenya 1921, and in 1924, the rates of personal income tax were set at 20 shillings for anyone earning less than 60 pounds, for earnings between 60 – 120 pound a charge of 40 shillings and for earnings for over 120 pounds a charge of 60 shillings.

In 1956, a commission of enquiry into the administration of income tax was established and chaired by Sir Erick        Coates.

3. Post-Independence Era: At post-independence, a strategy paper was introduced titled sessional paper no. 10 of 1965 on Africa Socialism and its application to planning in Kenya. It was stated specifically that the economic approach of the government would be dominated with ensuring “Africanization” of the economy and public service.

In 1970 and 1971, the finance ministry changed the policy of cautionary spending and began an expansionary policy which resulted in the introduction of sales tax in 1973. This was majorly contributed by abolishment of graduated personal tax on the grounds that it was burdensome for the poor who relied more on subsistence farming which could not raise sufficient money to pay for their tax. Again, it was not equally distributed as the rich paid the same amount of tax as the poor.

The oil crisis of 1973 led to an economic shock leading to a debt burden problem. This therefore resulted in fiscal reforms that saw an introduction of new taxes as below:

  • 20% withholding tax on non-resident entrepreneurs.
  • Capital allowance restricted to rural investment.
  • New tax on sale of property.
  • Taxes on shares
  • The sale of land and custom tariff of 10% on a range of previously duty-free goods.

In 1977 East African Community coupled with oil crises in 1980, led to reduced availability of domestic credit and lower returns from agriculture and commerce, causing a large drop in revenue. The Kenyan government responded by increasing the following taxes:

  • Sales tax from 10% to 15%
  • Excise duty from 50% to 59%
  • Personal income tax decreased from 36% to 29%

4. Technological Era: The last 3 decades from 1980 to 2010 has been characterized by the introduction of technology and increase in population (16.4 million in 1980 to 42 million in 2010); and rise in urbanization as an economic driving force. During the same period, sales tax was abolished and replaced by VAT in 1995. In the same year Kenya Revenue Authority was set up to oversee the customs and excise; VAT, and income tax department.

Present: Recent Development in Kenyan Taxation Regime.
The increase in population and rise in urbanization has led to an increase in demand for public goods and services. This has led to government borrowing to finance its deficit with the debt level currently standing at USD 38 million according to World Bank data 2022.

In addition, the government introduced digital service tax and other amendments in income tax, VAT, Excise and Customs (Finance Act, 2021) as a measure by KRA to increase revenue collection to finance government budget deficit.

Future: Future Development in Kenyan Taxation Regime.

Increase in international competition for foreign direct investments and increase in campaign for self-reliance through creativity and innovations shapes how the Kenyan tax law is to be structured. The new tax changes will be structured in a way that promotes local production and increases employment to the ever-growing young population which is projected to be approximately 78.2 million by 2040.

Modernization through the use of technology to tackle specific sector problems has been on the rise; characterized by an increase in foreign direct investments to the country to finance local businesses. This therefore means, in order to increase tax revenue through employment and income tax, the state through Kenya Revenue Authority needs to structure taxation policy that encourages the following

  • Financing of projects (partnership with private sectors) in the rural areas like electricity connectivity and good network of roads. This reduces rural-urban migration through increase in rural employment opportunities in blue- and white-collar jobs.
  • Partnering with private institutions like telcos to provide network bandwidth connectivity to rural areas to encourage innovations and creativity. This increases rural working population employability through remote working in the gig economy; which translates to employment tax base widening.
  • Continuance promotion of investment deduction to firms operating outside the major cities in Kenya to reduce over reliance on major cities for source of revenue and talent.

Finally, the future of work and transformation of the economy to a fully capitalistic one where every player is plugged in and understand their mandates can only be achieved through taxation reforms that promote patriotism and development desire among its population.

Author: Eddie Opiyo