Value Added Tax (VAT) is a consumer tax charged on the supply of taxable goods and services made in Kenya and importation of taxable goods or services made into Kenya.
VAT is levied under the VAT Act 2013 and the VAT regulations, 2017.
All traders with a turnover of taxable supplies of 5 Million per annum and above are required to register for VAT. Voluntary registration is allowed for traders with taxable supplies below the 5 Million threshold.
Types of supplies and the rates applicable;
- Local taxable sales- 16%
- Local supply of fuel- 8%
- Zero rated supplies and export- 0%
- Exempt supplies- No rate applicable
Once a supplier is registered for VAT, he/she is mandated to file a return by the 20th of the month following the making of the supply. A return must be filed by a registered person irrespective of whether there is a sale or not.
Time of supply
The tax point for accounting for VAT in a tax period shall be the earlier of:
- The date the supplies are delivered;
- The date on which the invoice is issued;
- The date a certificate is issued for construction services;
- The day on which payment for supply is received.
VAT on imported services
VAT is also applicable on imported services. This is also referred to as Reverse VAT.
Imported services are services provided by non- resident persons who are not required to register for VAT in Kenya. They may also be services provided by Export processing zones (EPZ) for use or consumption in Kenya.
The burden of tax on reverse VAT is on the importer.
Input tax on a taxable supply or importation may be deducted from the taxable pay by a registered person to the extent that the supply was acquired to make taxable supplies.
Period allowed to deduct input tax
Input VAT deduction is allowed for a period not more than six months from the date of supply or importation occurred. To deduct input tax incurred on taxable supplies, a tax payer must posses the requisite documentation supporting the input deduction.
Supplies prohibited from input tax deduction
Section 17(4) of the VAT Act excludes claims on purchase and repair of passenger vehicles, entertainment, restaurant services which are not business related.
Input tax deduction and apportionment of input VAT
In instances where input VAT exceeds out put VAT, the excess will be carried forward to subsequent months until fully exhausted without any limitations.
VAT refund is applicable in instances where the excess input VAT arises due to zero rated supplies.
VAT apportionment shall be applied in instances where the supplies have a mix of both taxable and exempt supplies and the below formulae shall be applicable;
The allocation formulae is as below;
C= (A / A+B) *100%
A= Is vatable sales
B= Exempt sales
C= Is the percentage of the amount of VAT input attributable to vatable sales
However, the following rules apply:
- Incase C is more than 90% the total input VAT will be deducted.
- Incase C is less than 10% No input VAT will be deducted
- Incase C is between 10% and 90% , only the percentage of the VAT input will be deducted.
Finance Act 2020- VAT
The Finance Act, 2020 has introduced an additional condition on deductibility of input tax. A person claiming input tax is required to hold the documentation provided for under Section 17 (3) or the registered supplier to have declared the output tax in their VAT return.
Tax Laws Amendment Act 2020-VAT on petroleum products
Taxable value is the consideration for the supply and includes any taxes, duties, levies, fees, and charges paid or payable on or by reason of the supply. Please note that the Tax Laws Amendment Act, 2020 (TLAA) revised the determination of taxable value for petroleum products listed in Section B of the First Schedule to the VAT Act. Initially, the taxable value of these petroleum products excluded excise duty, fees, and other charges. However, with effect from 15 May 2020, taxable value of petroleum products shall be the consideration for the supply and will include any taxes, duties, levies, fees, and charges paid or payable on or by reason of the supply.
Time limit for VAT refund application
The time within which taxpayers can seek refund of VAT paid on bad debts has been revised from five years to four years. Initially, taxpayers had a window period of five years to seek refund of VAT paid on bad debts aged three years and over. Following this amendment, businesses will need to be prompt in applying for VAT refunds on bad debts due to reduction of the window period within which VAT refund applications can be lodged with the revenue authority.
Value Added Tax on Digital Market Place Supplies
The Finance Act, 2020 brought under the ambit of Value Added Tax (“VAT”) supplies undertaken in the digital marketplace. VAT will be applicable on supplies undertaken in the digital marketplace at the standard rate when supplied in Kenya.
On 25th September 2020 via Legal Notice No. 190 of 2020, the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 were gazetted which sought to clarify how DST would work and the mechanics around the same.
A taxable supply will include what can be termed as a digital service provided by non-residents without a permanent establishment which are as follows:
- Downloadable digital content including downloadable mobile applications, e-books and films;
- Subscription-based media including news, magazines and journals;
- Over-the-top services including streaming television shows, films, music, podcasts and any form of digital content;
- Software programs including software, drivers, website filters and firewalls;
- Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
- Music and games;
- Search engine and automated helpdesk services including customizable search engine services;
- Tickets for live events, theatres or restaurants;
- Distance teaching through pre-recorded media or e-learning including online courses and training;
- Digital content for listening, viewing or playing on any audio visual or digital media;
- Services that links the supplier to the recipient including transport hailing services or platforms;
- Electronic services under Section 8 (3); and
- Any other service provided through a digital marketplace that is not exempt under the Act.
The need for Electronic Tax Receipt- ETR
It is mandatory to buy and maintain an Electronic Tax Register (ETR) to record sales, once you are registered for VAT. These are purchased from Kenya Revenue Authority (KRA) approved sellers. All sales whether vatable, zero rated or exempt shall be recorded in the register. This allows reconciliation of sales to actual tax returns that are filed with KRA.
As long as a person is registered for VAT obligation, even if he does not carry on any trading activities, he/she is required to file a return on or before 20th of the following month. Failure to comply is an offence subject to a penalty of Ksh 10,000 for every tax period failure occurs.
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