What happened

The Kenya Revenue Authority (KRA) announced the rollout of a refreshed Lipa Mdogo Mdogo (Pay Small, Pay Small) payment arrangement, allowing taxpayers who enroll to have all penalties and accrued interest fully waived. The initiative, reported by People Daily, is aimed at easing the cash‑flow burden on businesses and individuals who have struggled to meet tax obligations on time. Under the new terms, once a taxpayer signs up for the instalment plan, the KRA will remove any surcharge that would normally accrue on overdue amounts, effectively resetting the debt to the original tax due. The announcement was made in a public statement released earlier this month, signalling a shift in KRA’s enforcement stance.

Context and background

Lipa Mdogo Mdogo was first introduced in 2019 as a voluntary instalment scheme for taxpayers who could not settle their tax liabilities in a single payment. The programme allows debtors to spread the amount due over a period of up to 12 months, paying a fixed amount each month. Historically, the scheme has been popular among small and medium enterprises (SMEs) that face irregular cash flows, especially in sectors like agriculture, tourism and informal trade. However, participants have traditionally been charged penalties of up to 5% per month and interest at the prevailing Central Bank rate, which has eroded the benefit of spreading payments.

In recent months, the KRA has faced mounting criticism from business groups and civil society organisations, who argue that punitive penalties discourage compliance and push informal operators further away from the tax net. The Treasury and the Ministry of Finance have also been reviewing the overall tax compliance framework, seeking ways to boost revenue without stifling economic activity. The decision to waive penalties and interest entirely for Lipa Mdogo Mdogo participants appears to be a direct response to these pressures, aiming to restore confidence and encourage voluntary compliance.

While the People Daily release does not specify a launch date beyond the month of the announcement, the KRA has indicated that the new waiver will apply to all enrolments made from the date of the notice onward. The authority has also opened a dedicated portal on its website where taxpayers can register, upload supporting documents, and monitor their payment schedule. The move aligns with KRA’s broader digital transformation agenda, which includes expanding e‑filing, mobile tax payments and real‑time data analytics to improve service delivery.

Compared with what is normal

Under the standard Lipa Mdogo Mdogo framework, penalties for late instalments have typically ranged between 2% and 5% of the outstanding amount per month, while interest has been calculated at the Central Bank’s base rate plus a margin of 2‑3 percentage points. For a Sh10 million tax debt, a taxpayer could have faced an additional Sh500,000 to Sh1 million in penalties and interest over a year. By contrast, the current waiver removes these extra costs entirely, meaning the same Sh10 million debt will be repaid solely through the agreed instalments, without any surcharge.

• Typical penalty rate: 2‑5% per month (now 0%).
• Typical interest rate: Central Bank rate + 2‑3% (now 0%).
• Average instalment period: up to 12 months (unchanged).
• Potential savings: up to Sh1 million on a Sh10 million debt, depending on the original penalty and interest rates.

In practice, the waiver brings the Lipa Mdogo Mdogo scheme closer to a pure instalment loan, where the borrower only repays the principal amount. This is a significant departure from previous practice, where the cost of deferring payment could sometimes exceed the original tax due.

Why it matters

For Kenyan SMEs, especially those operating on thin margins, the removal of penalties and interest can free up cash that would otherwise be swallowed by compliance costs. The immediate effect is a lower effective tax burden, allowing businesses to allocate funds to inventory, payroll or expansion. For individual taxpayers, the waiver reduces the fear of mounting debt, encouraging those who have fallen behind to come forward and regularise their accounts.

The policy also has macro‑economic implications. By making the Lipa Mdogo Mdogo scheme more attractive, the KRA hopes to widen the tax base and improve collection rates without resorting to harsher enforcement. A larger pool of compliant taxpayers can translate into more stable revenue streams for the government, supporting budgetary allocations for health, education and infrastructure. Moreover, the waiver signals a more collaborative approach between the tax authority and the private sector, which could improve Kenya’s standing in international ease‑of‑doing‑business rankings.

However, the move also raises questions about revenue shortfalls in the short term. If penalties and interest previously contributed a notable share of KRA’s collections, their removal may create a temporary dip in cash inflows. The authority will need to balance this risk against the longer‑term gains from higher compliance rates.

Practical steps

• Visit the KRA Lipa Mdogo Mdogo portal (kra.go.ke/lipamdogo) and check eligibility criteria – typically you must have an outstanding tax liability and be up to date on filing returns.
• Gather supporting documents such as the latest tax assessment, bank statements and proof of income to upload during registration.
• Calculate a realistic monthly instalment that aligns with your cash flow; the portal will suggest a schedule based on the amount owed.
• Submit the enrolment form and wait for confirmation from KRA. Once approved, the waiver on penalties and interest will be applied automatically.
• Monitor your payment schedule through the KRA mobile app or online portal to ensure timely payments and avoid accidental defaults.

By following these steps this week, you can lock in the waiver and start repaying your tax debt without the extra financial burden of penalties.

Beavoren Ventures’ Tax Planning & Compliance service can help you assess whether Lipa Mdogo Mdogo is right for your business, prepare the necessary documentation and ensure you stay on track with payments.

Need help with compliance? Email info@beavorenventures.co.ke or call +254 716 296 857.

Disclaimer: This article is informational and does not constitute formal tax, audit or legal advice. For guidance specific to your circumstances, please contact Beavoren Ventures.