The informal sector, commonly referred to in Kenya as the Jua Kali industry, comprises self-employed individuals and small to micro-enterprises operating outside the formal regulatory framework.
These businesses are often unregistered and untaxed, despite playing a
significant role in employment and economic activity.
According to the Economic Survey 2025, this sector accounts for 90% of Kenya’s total working population and contributes 24% to the GDP.
Employment in the informal sector rose by 4.2% to 17.4 million in 2024, continuing a consistent upward trend.
This growth has outpaced that of the formal sector, which now employs five times fewer people than the informal economy.
Despite its importance, informality imposes a heavy fiscal burden. Tax evasion is widespread, particularly in the informal sector, due to its opaque nature.
The lack of registration and recordkeeping among these enterprises makes it difficult for the government to collect taxes, thereby reducing public revenues necessary for service delivery and infrastructure development.
The Parliamentary Budget Office estimated in 2020 that the government loses approximately Kshs. 200 billion annually due to its inability to tax the informal sector effectively.
Beyond the direct loss in revenue, the informal sector’s prevalence erodes the rule of law, excludes many from public procurement opportunities, and creates unfair competition for law-abiding formal businesses.
Kenya’s government has made efforts to address these challenges through Tax Base Expansion Programmes, simplifying licensing, easing regulatory requirements, and improving infrastructure.
However, informality remains high. A key reason is the limited capacity of the formal sector to absorb the growing labour force. Many are pushed into the informal economy out of necessity.
High taxation, complex compliance procedures, and bureaucratic red tape discourage small enterprises from formalising.
Entrepreneurs often opt to remain informal to avoid these costs, despite the long-term disadvantages of operating outside legal protections.
There is also a widespread perception that formalisation doesn’t provide tangible benefits. Many informal traders view taxes as a cost with no corresponding public value due to poor service delivery.
Coupled with limited awareness about tax obligations and a lack of structured engagement between the state and the informal sector, this mistrust perpetuates non-compliance.
Counties face similar difficulties. Over 90% of businesses in Kenya are informal, narrowing the tax base at the subnational level.
Data from the Office of the Controller of Budget reveals that counties have failed to meet their Own Source Revenue (OSR) targets every fiscal year since devolution began. On average, OSR accounts for just 10% of total county revenues, showing significant untapped potential.
To illustrate the scale of non-compliance, consider the 2022 general elections, where over 14 million Kenyans voted. Yet, only 6.3 million people filed tax returns in the 2022/23 fiscal year.
This suggests a large number of economically active citizens remain outside the tax net. One reason may be the Kenya Revenue Authority’s iTax system, which many informal sector participants find cumbersome and inaccessible.
For the informal sector to contribute meaningfully to national development, targeted and inclusive policy interventions are necessary. First, simplifying the tax registration and filing process can lower entry barriers. Mobile and digital tools tailored for informal businesses can improve accessibility.
Second, tax education campaigns can raise awareness about obligations and entitlements. If taxpayers understand where their money goes and how it improves their communities, compliance is likely to improve.
Third, building trust is essential. The government must demonstrate through consistent service delivery that taxation yields public value. Partnerships with associations within the informal sector can help co-create policies that are fair, realistic, and enforceable.
Fourth, leveraging data is key. A better understanding of the informal economy’s structure, location, and revenue potential can support smart taxation without stifling livelihoods.
Bringing the Jua Kali sector into the tax fold is not just about expanding the revenue base. It is about formalising the economy in a way that empowers small enterprises, protects workers, and creates a level playing field.
Done thoughtfully, this shift can unlock fiscal space for national and county governments to invest in health, education, roads, and security - public goods that benefit all Kenyans.
The informal sector is a goldmine not just for job creation, but also for boosting domestic resource mobilisation.
To tap into its full potential, Kenya must move beyond punitive approaches and instead offer incentives, reduce red tape, and cultivate a culture of voluntary compliance.
Oscar Ochieng is a communications practitioner
