No eTIMS Invoice, No Deduction: Kenya’s Income Tax Rule Explained

A business can pay a supplier, hold a legitimate receipt, and still lose the tax deduction for that expense under Kenyan law if the invoice behind it was not generated through the Kenya Revenue Authority’s electronic tax invoicing system. Section 16(1)(c) of the Income Tax Act, inserted by the Finance Act, 2023 alongside the eTIMS mandate itself, ties deductibility directly to invoice compliance, and from 1 January 2026 the Authority has the data to actually enforce it at the point a return is filed. This is the mechanism that turns eTIMS from a paperwork requirement into a real tax cost for businesses that have not brought their supplier base into compliance.

The Rule: Section 16(1)(c) of the Income Tax Act

Section 16(1)(c), as amended by the Finance Act, 2023, disallows a deduction for “any expenditure or loss where the invoices of the transactions are not generated from an electronic tax invoice management system except where the transactions have been exempted in accordance with the Tax Procedures Act, 2015.” The effect is direct: an expense that would otherwise reduce taxable profit under ordinary deductibility principles is added back if the underlying invoice did not come through the eTIMS or TIMS system, regardless of whether the payment itself is genuine and properly documented in every other respect.

How This Interacts With the eTIMS Exemptions

Section 16(1)(c) is not a blanket rule against every expense lacking an electronic invoice. Because it explicitly defers to the Tax Procedures Act’s own exemptions, an expense that falls within one of the categories excluded from the section 23A invoicing requirement, such as emoluments already taxed under PAYE, imported goods, interest and financial institution charges, or airline ticketing, remains deductible without an eTIMS invoice. The practical question for any business reviewing its expense base is therefore not simply “do I have an eTIMS invoice for this,” but “is this transaction one that required an eTIMS invoice in the first place.” Getting that distinction wrong in either direction, either disallowing a properly exempt expense or claiming a deduction for a transaction that needed an invoice it never got, creates avoidable exposure.

The Penalty Layer: Section 86 of the Tax Procedures Act

Separately from the deduction disallowance itself, the Finance Act, 2023 also amended the penalty provisions of the Tax Procedures Act. Under the amended section 86, where a taxpayer’s explanation for a failure connected to electronic tax invoicing does not satisfy the Commissioner, the taxpayer becomes liable to a penalty of two times the tax due. This sits on top of, rather than instead of, the underlying loss of the deduction: a business can face both a higher taxable profit from the disallowed expense and a penalty calculated on the resulting tax if the Commissioner is not satisfied that the invoicing failure was justified.

The January 2026 Validation Layer Changes the Practical Risk

For over two years, section 16(1)(c) existed as a rule a business could, in practice, get away with overlooking, since the Authority had no systematic way to check every claimed expense against eTIMS records at the point of filing. That changed on 1 January 2026, when the Authority began validating income and expenses declared in 2025-year income tax returns against TIMS and eTIMS invoice data, withholding tax data, and customs import records. An expense that a business has been claiming for years on the strength of a supplier’s ordinary receipt is now exposed the first time that return is filed and checked against the electronic record, not years later on audit. This materially changes the risk calculus for any business that has been slow to insist on compliant invoicing from its suppliers.

Practical Steps for Businesses With Informal Suppliers

Businesses that rely on smaller or informal suppliers, such as farmers, transport operators, or jua kali workshops, face the sharpest version of this problem, since these suppliers are often the least likely to have onboarded onto eTIMS voluntarily. The Authority’s eTIMS Lite channel exists precisely to bring non-VAT-registered and small suppliers into the system with minimal friction, and a business with exposure here should be actively directing suppliers to onboard rather than waiting for them to do so unprompted. Businesses should also review supply contracts to make compliant invoicing an explicit condition of payment, keep clear internal documentation of which expense categories are genuinely exempt under section 23A, and reconcile their eTIMS invoice records against claimed expenses before filing, rather than after the Authority raises a query.