VAT in Kenya: What is VAT, How to Calculate it, Eligibility, and Rates in Kenya

In Kenya, Value Added Tax (VAT) plays a significant role in the government's revenue collection efforts. Businesses must understand VAT, from its rates to registration and compliance, to ensure they operate within the legal framework. In this comprehensive guide, we will explore the key aspects of VAT in Kenya, covering what VAT is, how to calculate it, who should register, VAT rates, registration processes, filing returns, input tax credits, penalties, and more. Let's dive in and demystify VAT for you.

Key Takeaways from this Article

1. VAT (Value Added Tax) is a consumption tax imposed on taxable goods and services at each stage of the supply chain in Kenya.
2. There are three VAT rates in Kenya: 0%, 8%, and 16%, depending on the type of goods and services.
3. VAT is calculated as the difference between output VAT (charged to customers) and input VAT (paid on purchases).
4. Businesses with an annual turnover of Kshs. 5 million or more must register for VAT.
5. Late filing and payment of VAT can result in penalties and interest charges.

What is Value Added Tax (VAT)?

Value Added Tax, commonly known as VAT, is a consumption tax levied on the supply and importation of taxable goods and services at each stage of the supply chain, from production to consumption. It is administered by the Kenya Revenue Authority (KRA). VAT is applied whenever value is added to goods or services, and it is collected by registered businesses at various points in the supply chain before being remitted to KRA.

Who Should Register for VAT?

Now, let's clarify who should register for VAT in Kenya. The Kenya Revenue Authority (KRA) has set specific conditions and documentary requirements for businesses and individuals to be eligible for VAT registration. If you meet any of the following criteria, you should consider registering for VAT:

1. Annual Taxable Turnover: If your business is projected to have or has an annual taxable turnover of Kshs. 5,000,000 and above, VAT registration is mandatory.
2. Voluntary Registration: In some cases, even if your turnover doesn't reach the 5 million mark, you can still voluntarily register for VAT if you make taxable supplies.

To initiate the registration process, you must provide various documents, including your business permit, tax compliance certificates, and contact details. Registration is done online via the iTax system, making it convenient for businesses of all sizes.

VAT Rates

Kenya's VAT system operates under three different tax rates, each applicable to specific categories of goods and services:

1. 0% Rate: This rate applies to zero-rated supplies, including goods listed in the 2nd Schedule to the VAT Act. Examples of zero-rated supplies include exporting goods/services, goods supplied to Export Processing Zones (EPZ), privileged persons, and public bodies.
2. 8% Rate: This rate is reserved for petroleum oils obtained from bituminous sources, motor spirits, aviation spirits, and similar products.
3. 16% Rate: The general rate for all other goods and services falls under this category.

Please note that businesses with an annual turnover of less than Kshs. 5 million are only required to charge VAT if they voluntarily register.

How Does VAT Work?

VAT is applied at each stage of the supply chain until it reaches the final consumer. For example, if you're selling a product, VAT is added at every stage, from the raw materials to the wholesaler and, finally, to the consumer. Businesses collect VAT from their customers when making sales and pay the VAT they've collected to KRA.

Top 10 Experiences Of My Life

Calculating VAT in Kenya

To calculate VAT, you need to understand the difference between input VAT and output VAT:

• Input VAT: This is the VAT you pay when purchasing goods or services from suppliers. It is an expense to your business.
• Output VAT: This is the VAT you charge your customers when selling goods or services. It is your revenue.

The VAT payable is the difference between the output VAT and input VAT:

VAT Payable = Output VAT - Input VAT

• For instance, if you buy goods for Kshs. 1,000 with a 16% VAT, you pay Kshs. 160 as input VAT. When you sell those goods for Kshs. 1,100 with the same VAT rate, you charge Kshs. 176 as output e

Filing VAT Returns

VAT returns must be filed monthly through the iTax platform by the 20th of the following month. Even if you have no VAT, you must still file a nil return. After filing online, generate an E-slip from iTax, which is used to pay the VAT amount at KRA-appointed banks physically. Alternatively, you can authorize your bank for a direct credit payment to the Commissioner's account at the Central Bank of Kenya.

How to Pay for VAT

After filing your VAT return online, the next step is to physically pay the tax at KRA-appointed banks. You can also authorize your bank to facilitate a direct credit transfer to the Commissioner's acc

Input Tax Credits

Businesses can claim deductions for input VAT paid when making purchases. This helps offset the VAT payable when making sales. Input tax credits can be deducted within six months of the tax period in which the sale occurred.

Penalties

Timeliness is crucial when it comes to VAT compliance. Failure to meet the deadlines can result in penalties, including:

• Late Filing: You may face a penalty of either Kshs. 10,000 or 5% of the tax due, depending on which is higher.
• Late Payment: Late payment incurs a penalty of 5% of the tax due, along with a late payment interest of 1% per month on the unpaid tax until the full amount is settled.

Electronic Tax Invoice

The electronic tax invoice, generated from a compliant Electronic Tax Register (ETR) or eTIMS system, includes a QR code for accurate record-keeping. Issuing electronic tax invoices is mandatory for all VAT-registered taxpayers.

VAT on Imports

Imported goods are subject to import duty at various rates. However, when it comes to VAT on imported services, it's known as reverse VAT. Importers of services must account for reverse VAT when the imported service is partly used for making exempt supplies.

Withholding VAT

Withholding VAT is a mechanism where government-appointed withholding agents collect a portion of VAT from payments made to local sellers. This mechanism ensures proper payment of VAT. The amount withheld is 2% of the value of taxable supplies and is paid to the Commissioner by the 20th day of the following month.

Deregistration of VAT

If your business is no longer required to register for VAT due to a falling turnover or other reasons, you can apply for deregistration with the Commissioner. Deregistered businesses are no longer obligated to comply with VAT requirements.

If you have any further questions about VAT or need assistance with VAT compliance, feel free to explore the Kenya Revenue Authority (KRA) website or consult with a tax professional.

READ ALSO: KRA Car Import Duty: What Is It, Car Import Duty Calculator, Rates, and Fees

Conclusion

Understanding and complying with VAT regulations in Kenya is essential for businesses of all sizes. VAT affects your pricing, cash flow, and overall financial health. By correctly registering, calculating, and filing VAT, you ensure KRA compliance while avoiding penalties and interest charges. Remember that VAT laws may change over time, so it's crucial to stay updated and seek professional advice when necessary.

FAQs

Who is required to register for VAT in Kenya?

• Businesses with an annual taxable turnover of Kshs. 5,000,000 and above must register for VAT. Voluntary registration is also an option.

What are the VAT rates in Kenya?

• Kenya has three VAT rates: 0%, 8%, and 16%, applicable to different categories of goods and services.

When is VAT payable in Kenya?

• VAT becomes due when goods or services are supplied, an invoice is issued, payment is received, or a relevant certificate is issued.

How often do I need to file VAT returns in Kenya?

• VAT returns must be filed on a monthly basis via the iTax platform, even if there is no VAT to declare.

What are the penalties for late filing and payment of VAT in Kenya?

• Late filing can result in a penalty of either Kshs. 10,000 or 5% of the tax due, whichever is higher. Late payment incurs a penalty of 5% of the tax due, along with a 1% monthly interest on the unpaid tax until it's settled.

What is Withholding VAT in Kenya?

• Withholding VAT is a process where government-appointed withholding agents collect 2% of the value of taxable supplies and remit it to the Commissioner. It applies to certain transactions and not to zero-rated supplies or exempt goods/services.