Learn what Value Added Tax (VAT) is in Kenya. Our simple guide explains VAT, the process of VAT registration in Kenya, online VAT filing via iTax and eTIMS, input/output tax, VAT rates Kenya, and VAT compliance tips for businesses and consumers.
Introduction
Value Added Tax (VAT) in Kenya is an indirect consumption tax paid by the person who consumes taxable goods and services. VAT is a critical component of Kenya’s tax system and applies to both domestic supplies and imported goods or services. Whether you are a taxpayer, small business owner, or a large corporation, understanding VAT Kenya is crucial for ensuring VAT compliance Kenya. This guide explains what VAT is, how to register for VAT online, the process of VAT filing via iTax, and best practices for VAT input tax deductions and record keeping.
What is Value Added Tax (VAT)?
VAT is an indirect tax in Kenya that is levied at each stage of the supply chain. Here’s what you need to know about VAT Kenya:
Indirect Tax:
Unlike direct taxes such as income tax, VAT is not paid upfront by the seller or consumer but is passed on to the final buyer. The final consumer ultimately bears the cost, making it a consumer-paid tax.
Consumer-Paid Tax:
The cost of VAT is included in the purchase price of taxable goods and services. Businesses act as VAT agents by collecting the tax on behalf of the government.
Applicable to Imports:
VAT is also imposed on goods and services imported into Kenya. Importers are responsible for paying VAT on these taxable imports under VAT on imported services Kenya guidelines.
Who Needs to Register for VAT?
Eligibility Criteria for VAT Registration in Kenya:
Mandatory VAT Registration:
If your business supplies taxable goods and services and your annual turnover is Kshs 5 million or more, you must register for VAT.
VAT registration online is mandatory for businesses that meet this threshold.
Voluntary VAT Registration:
Businesses with turnover below the threshold can opt for voluntary registration under specific conditions. Voluntary VAT registration Kenya provides access to input tax credits.
Digital Marketplace & Imported Services:
Non-resident suppliers and digital marketplace sellers must register for VAT regardless of their turnover. Digital VAT registration Kenya applies to online vendors and service providers.
Registration Process:
Identification:
Once registered for VAT, businesses receive a Personal Identification Number (PIN) with a VAT obligation—a key step in VAT registration Kenya.
On-Boarding on eTIMS:
All VAT-registered taxpayers must sign up on the eTIMS portal or visit a KRA Tax Service Office. Using eTIMS VAT streamlines compliance and enables you to manage your online VAT filing Kenya.
How VAT Works: Input and Output Tax
VAT in Kenya operates on the Input/Output Tax system, which is essential for understanding VAT compliance Kenya:
Output Tax:
This is the VAT charged on your sales of taxable goods or services. It is collected by businesses on behalf of the government and reported in your VAT return Kenya.
Input Tax:
This is the VAT paid on purchases for your business. VAT input tax is deductible from your output tax, reducing your overall VAT liability.
Calculating VAT:
The formula for calculating VAT payable is:
Output Tax – Input Tax = VAT Payable
Example Calculation:
Purchases:
Net purchase price: Kshs 10,000
16% VAT on purchase: Kshs 1,600 (Input Tax)
Gross purchase price: Kshs 11,600
Sales:
Net sales price (including 20% profit margin): Kshs 12,000
Add 16% VAT on sales: Kshs 1,920 (Output Tax)
Final selling price: Kshs 13,920
VAT Payable Calculation:
Output Tax (1,920) – Input Tax (1,600) = Kshs 320 VAT Payable
Note: Withholding VAT credits and excess input tax carried forward can reduce the final VAT payable.
VAT Rates and Categories in Kenya
In Kenya, VAT is levied at two main rates:
General Rate – 16%:
Applies to most taxable goods and services under VAT rates Kenya. This is the standard rate applied on the majority of transactions.
Zero Rate – 0%:
This rate applies to specific goods and services detailed in the Second Schedule of the VAT Act, 2013. Zero-rated VAT Kenya applies to selected items like certain exports or essential goods.
Note: An 8% rate was previously used for some supplies (e.g., petroleum products) but was removed effective 1st July 2023 by the Finance Act, 2023.
For businesses that deal exclusively in exempt goods or services (listed in the First Schedule of the VAT Act), VAT registration is not required, and any related input tax is non-deductible. These rules are critical for maintaining VAT compliance Kenya.
Filing and Payment Deadlines for VAT
Staying on top of your deadlines is vital for online VAT filing Kenya:
Due Date:
VAT returns and payments are due on or before the 20th day of the month following the reporting period.
Online Filing via iTax:
Submit your VAT returns through the iTax portal. Online VAT filing Kenya via iTax simplifies the process and ensures timely compliance.
How to Make a VAT Payment:
Log in to iTax:
Enter your PIN and password to access your account.
Access the Payments Tab:
Select Payment Registration for the VAT tax head.
Enter Your Tax Period:
Choose your applicable tax period and add your liability.
Submit to Generate a Payment Slip:
Use the generated payment slip to pay at a KRA-approved bank or via Mpesa (using the designated Paybill number).
Input Tax Deduction and Record Keeping
Input Tax Deduction:
Registered businesses can claim input tax deductions—VAT input tax deduction Kenya—on eligible purchases. This deduction must be claimed within six months after the tax period during which the purchase was made.
Record Keeping:
Maintain detailed records of all VAT transactions either in hard copy or electronically to support your claims. Proper VAT record keeping Kenya is essential for audit purposes and ensures smooth VAT compliance Kenya.
Special Considerations and VAT Compliance
Time of Supply (Tax Point):
The tax point indicates when VAT becomes due:
- Delivery Date: When goods are delivered or services performed.
- Invoice Issuance: When the invoice is issued for a sale.
- Payment Receipt: When payment is received or when a certificate is issued in special circumstances.
Digital Marketplace Supplies:
Non-resident suppliers making sales over the internet must register for VAT. Digital VAT registration Kenya ensures that all taxable supplies via online networks are properly captured.
Withholding VAT:
A withholding VAT of 2% is imposed on certain taxable supplies. This withholding VAT Kenya is remitted by the withholding agent to KRA on the 20th day of the following month, and taxpayers must still file their VAT returns.
VAT Special Table:
Some VAT-registered businesses may be placed on a VAT Special Table by KRA if found non-compliant or involved in fraudulent activities. Businesses on the special table face restrictions on filing VAT returns and claiming input tax deductions, and should contact their local KRA office for guidance.
Value Added Tax (VAT) in Kenya is a pivotal part of Kenya’s tax system, affecting both consumers and businesses. Understanding how VAT works—from VAT registration in Kenya and online VAT filing in Kenya via iTax and eTIMS to VAT input/output tax calculations, VAT rates, and record keeping—is essential for maintaining compliance and optimizing cash flow. Whether you are a small business owner or a large corporation, staying updated with KRA VAT guidelines and leveraging modern online tools ensures that you meet your tax obligations effectively.
For more expert advice on VAT registration in Kenya, VAT filing online, and overall VAT compliance, contact our professional tax consultancy services today. Let us help you navigate the complexities of VAT Kenya and maximize your tax benefits with accurate input tax deductions and efficient online tax filing.
