The Kenya Revenue Authority (KRA) has significantly expanded the scope of the Electronic Tax Invoice Management System (eTIMS). While many organisations initially assumed the requirements primarily affected VAT-registered businesses, the reality is broader.
Non-Governmental Organizations (NGOs), charities, and other non-profit entities must now pay close attention to how they document expenses – even where they are not making taxable supplies.
This article unpacks what the changes mean for NGOs, clarifies common misconceptions, and outlines practical steps to safeguard tax compliance.
1. eTIMS Is No Longer Limited to VAT-Registered Entities
KRA introduced eTIMS under Section 23A of the Tax Procedures Act and the VAT (Electronic Tax Invoice) Regulations to enhance transparency and curb tax leakage. Subsequent public notices and guidance have clarified that the requirement extends beyond VAT-registered businesses.
Under current guidance, any person carrying on business in Kenya is required to use eTIMS for invoicing where they intend to claim expenses for tax purposes.
Importantly, the term “business” in tax law is broadly defined. It includes trade, profession, vocation or any activity carried on for gain or benefit, and this may extend to certain income-generating activities conducted by NGOs.
What this means for NGOs:
- NGOs may need to register on eTIMS even if not VAT-registered.
- Where expenses are claimed in income tax computations, supporting invoices must generally be eTIMS-generated (unless specifically exempted).
- Traditional manual receipts may not meet deductibility requirements under the updated framework.
Relevant KRA references:
- Tax Procedures Act, Section 23A
- VAT (Electronic Tax Invoice) Regulations, 2020
- KRA Public Notices on Mandatory eTIMS Adoption (2023–2024)
- KRA eTIMS Implementation Guidelines (available on www.kra.go.ke)
2. Grants and Donations Remain Non-Taxable – But That Is Not the Core Issue
A frequent concern among NGOs is whether donor funding must be invoiced through eTIMS.
The answer is straightforward:
- Donor grants and donations are not considered taxable supplies.
- NGOs do not issue tax invoices to donors for grant receipts.
- Receiving a grant does not trigger eTIMS output requirements.
However, the compliance issue arises on the expenditure side, not the funding side.
Even if grant income itself is tax-exempt or not income in nature, expenses incurred using those funds must still comply with tax documentation requirements if they are claimed in income tax filings.
This distinction is critical.
3. The Real Exposure: Disallowed Expense
Many NGOs operate on a not-for-profit basis. However, from a tax perspective, surplus income can still be subject to corporation tax unless the organisation holds valid tax exemption status under the Income Tax Act.
Under the current eTIMS framework:
- Expenses not supported by valid eTIMS invoices (where required) may be disallowed for income tax purposes.
- Disallowed expenses increase taxable surplus.
- Increased taxable surplus may result in unexpected corporation tax liabilities.
Even organisations that consider themselves “non-profit” can face tax exposure if expense documentation does not meet statutory requirements.
For NGOs that prepare annual returns reflecting grant income against program expenditure, the integrity of expense documentation has now become a central compliance risk area.
4. Expenses That Are Generally Exempt from eTIMS Invoicing Requirements
KRA has clarified that certain transactions do not require eTIMS-generated invoices to qualify for tax purposes.
These typically include:
- Salaries, wages, and statutory payroll deductions
- Bank charges, loan interest, and financial institution fees
- Import transactions (supported by customs documentation)
- Expenses subject to final withholding tax
- Air passenger ticketing
- Insurance premiums
- Utilities supplied by regulated providers (subject to specific documentation)
However, NGOs should review each expense category carefully and cross-check against KRA’s most recent public notices to confirm applicability.
Not all payments fall within these exclusions.
5. Procurement Risk: Supplier Non-Compliance
One of the biggest operational risks for NGOs lies in supplier compliance.
If a supplier fails to issue a valid eTIMS invoice where required:
- The NGO’s expense claim may be invalid.
- The tax burden effectively shifts to the NGO.
- Audit exposure increases.
Finance teams should therefore:
- Update supplier onboarding procedures.
- Verify eTIMS registration status for regular vendors.
- Include contractual clauses requiring compliant invoicing.
- Train procurement officers on documentation standards.
6. Buyer-Initiated Invoicing: A Practical Solution
KRA has provided a buyer-initiated invoicing mechanism within eTIMS for situations where small suppliers are unable to generate compliant invoices themselves.
This allows the purchaser (including an NGO) to:
- Generate the invoice on behalf of the supplier.
- Ensure compliance at the point of transaction.
- Protect deductibility of the expense.
This tool is particularly useful when working with small community vendors or rural suppliers who may not have adopted eTIMS.
7. Strategic Actions for NGO Boards and Finance Committees
To mitigate compliance risk, NGOs should consider the following steps:
A. Conduct an eTIMS Readiness Assessment
Review:
- Whether the organisation is registered on eTIMS.
- The nature of income streams.
- Expense categories claimed in tax filings.
B. Review Tax Exemption Status
Confirm:
- Whether the organisation holds a valid tax exemption certificate.
- Whether the exemption covers all income streams.
C. Update Internal Controls
Strengthen:
- Expense approval workflows.
- Documentation requirements.
- Vendor contracts.
D. Train Finance & Program Teams
Ensure that both finance staff and program managers understand:
- Why compliant invoices matter.
- The link between documentation and tax exposure.
- How to identify valid eTIMS invoices.
8. Audit Preparedness Under the New Regime
KRA’s digitisation strategy enables real-time cross-referencing of invoice data. This means:
- Inconsistencies are easier to detect.
- Non-compliant expense claims can be flagged quickly.
- Audit cycles may become more data-driven and less manual.
For NGOs reliant on donor confidence, reputational risk can be as significant as financial risk.
Proactive compliance is therefore both a tax and governance priority.
9. Key Takeaways for NGO Leadership
- eTIMS requirements now extend beyond VAT-registered businesses.
- Grants remain non-taxable, but expense documentation is critical.
- Non-compliant invoices may result in disallowed deductions.
- Supplier compliance is essential.
- Buyer-initiated invoicing provides a practical workaround.
- Internal controls must be strengthened.
Final Thoughts from Seal Associates
For NGOs in Kenya, the evolving eTIMS landscape represents more than a procedural adjustment – it is a shift in how tax deductibility is substantiated.
While donor funding remains outside the tax net, expense compliance is now under greater scrutiny. Organisations that act early will reduce exposure to disallowed costs, unexpected tax liabilities, and audit challenges.
At Seal Associates, we recommend that NGOs treat eTIMS compliance as part of broader financial governance reform – not merely a technical tax requirement.
If your organisation would like assistance reviewing its eTIMS status, tax exemption position or internal controls framework, our team is available to support you.
Godfrey Ndegwa
+254 7132 81299