VALUE ADDED TAX (VAT)
VAT is an indirect tax that is paid by the person who consumes taxable goods and services
supplied in Kenya and/or imported into Kenya. It is a tax on the value added and is governed by
the VAT tax act of 2013. The VAT on goods and services supplied in Kenya is collected at
designated points by VAT registered persons who act as agents of the government.
Eligibility
Any person supplying or expects to supply taxable goods or taxable services with a value of Ksh.
5 million or more in a year is required to register for VAT. Every VAT registered taxpayer
should install and use an Electronic Tax Register (ETR) from approved suppliers to account for
all sale transactions and issue ETR invoices to every customer.
The liability to VAT rests with the person making the taxable supply of goods and services.
However the liability to VAT in respect of imported taxable goods/services rests with the
recipient/buyer.
VAT on imported goods into Kenya is payable at the point of customs entry by the importer.
DEFINITION OF KEY TERMS
Input Tax: Refers to a tax paid by a registered person on purchase of goods or services for the
purpose of his business.
Note: It does not include tax paid on capital goods such as Motor Vehicles, Furniture and
Fittings etc.
Input tax deduction shall be allowed within six months after the end of the tax period in which
the supply or importation occurred, failure of which it is forfeited or withdrawn. This must be
supported by an original or certified copy of the invoice and electronic tax receipt (ETR).
Output tax: Refers to tax charged on the sales of taxable goods or services.
VAT payable = Output tax – Input tax
EXAMPLE 1
Purchases Ksh.
Purchases (net price) 10,000
Add: 16% VAT 1,600
Gross purchase price 11,600
Sales
Gross purchase price 11,600
Less: VAT paid 1,600
Net purchase price 10,000
Add: profit margin (e.g 20%) 2,000
Net sales price 12,000
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Add: 16% VAT 1,920
Selling price 13,920
VAT payable 1,920 – 1,600 = Ksh. 320
If the input tax exceeds the output tax, the tax payer is said to be in a VAT refund position. This
excess amount will usually be claimed from the commissioner directly if this is common feature
due to the nature of business. Where this is not a common feature, the refund will be carried
forward to offset the VAT liability that will arise in future.
Supply: Means supply of goods and services.
Supply of goods: This refers to;
a) A sale, exchange, or other transfer of the right to dispose off the goods as owner.
b) Provision of electrical or thermal energy, gas or water.
Supply of services: Means anything done that is not a supply of goods or money. This includes;
the performance of services for another person.
Taxable Supply: A supply other than an exempt supply, made in Kenya by a person in the
course or furtherance of a business carried on by the person, including a supply made in
connection with the commencement or termination of a business.
Tax Period: This is one calendar month or such other period as may be prescribed by the
regulation.
Debit notes and Credit notes: A debit note is issued after undercharging a customer i.e it is an
additional invoice. This increases the value of output tax. A credit note is issued after
overcharging a customer i.e decreases the amount receivable from the customer. It reduces the
amount of output tax.
Value of Supply: This is the price at which taxable goods and services are provided. This
amount is multiplied by the rate of VAT to arrive at VAT payable
Time of supply (Tax point). Refers to the time when VAT becomes due and payable. It is the
earliest of;
i) The date on which the goods are delivered or services performed.
ii) The date on which the tax invoice for the supply is issued.
iii) The date on which payment for the supply is received in whole or part.
Obligations of a VAT registered taxpayer
i) Notify the commissioner in writing in case of any change of name, including business
name, address, and place of business.
ii) File tax returns on time.
iii) Pay tax due on time.
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iv) Pay penalties and interest where applicable.
TYPES OF SUPPLIES
Standard Rate supplies. This is the general VAT rate that is commonly applied in Kenya on
vatable goods and services. Currently it is at 16%.
Zero Rate supplies/Exports. This is where VAT is charged on goods and services but at 0%.
Exempt supplies. This is where various goods and services are not subjected to VAT. i.e no
VAT rate is applied on those goods and services.
Differences between zero rated supplies and exempt supplies
Zero rated supplies Exempt supplies
-They require VAT registration -No VAT registration is required
-The business firms are allowed to charge -The firms should not charge VAT and are
VAT and to claim input tax not allowed to claim input tax
- The firms are required to issue a tax -They need not issue a tax invoice.
invoice on all their supplies - Input tax becomes part of cost of sale
- Input tax is not included in cost of sale
VAT REFUND
A tax payer can get a refund of VAT in the following circumstances.
i) When VAT was paid in error eg overpayment of VAT, use of wrong rate, miscalculation
etc. No refund shall be made unless a claim is lodged within twelve (12) months from the
date the tax became due and payable.
ii) When a debtor of a taxable person is declared bankrupt or insolvent. Where a registered
person has made a supply and has accounted for and paid tax on that supply but has not
received any payment from the person liable to pay the tax, he may, after a period of
three (3) years from the date of that supply or where that person has become insolvent,
apply to the commissioner for a refund. No application for such a refund shall be made
after the expiry of four (4) years.
Refund of VAT on bad debt
This is granted where a registered person fails to recover the amount on a customer. For the bad
debt refund to be granted, one must have the following:
Original tax invoice
Evidence that the person is insolvent
Evidence that the tax has been paid
Evidence that efforts have been made to recover the amount
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NOTE: When a person fraudulently claims VAT refund on bad debts, he shall be liable to pay a
penalty which is double the amount of the claim.
Registration for VAT
A person who makes or intends to make taxable supplies may apply to the commissioner for
voluntary registration. For voluntary registration to be effected, the commissioner must be
satisfied that;
The person is making or shall make taxable supplies.
The person has a fixed place from which his business is conducted.
If the person has commenced carrying on the business, he has kept proper books of
account.
There are reasonable grounds to believe that the person shall keep proper records and file
regular and reliable tax returns.
VAT RECORD KEEPING
VAT records should be kept for a period of five (5) years from the date the last entry was made
therein.
The following records should be maintained
i) Copies of all tax invoices
ii) Copies of all debit and credit notes
iii) Purchase invoices
iv) Tax (VAT) account
v) Copies of stock records
vi) Details of each supply of goods and services
VAT ACCOUNT
INPUT TAX OUTPUT TAX
Purchases xx Sales (Standard rate) xx
Imports xx Exports (0%) xx
Services received xx Debit notes issued xx
Debit notes received xx Credit notes issued (xx)
Credit notes received (xx)
Some expenses paid xx
Returns outwards ( xx)
Bad debts xx
VAT PAYABLE (Bal. fig) xx VAT CLAIMABLE (Bal. fig) xx
xxx xxx
VAT payable = Output VAT – Input VAT
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RESTRICTION OF INPUT TAX
A taxable person may be dealing in both taxable supplies (standard rate sales and zero rate sales)
and non-taxable supplies/exempt sales
If a taxable supply to, or a taxable import by, a registered person during a tax period relates
partly to making taxable supplies and partly for another use, the input tax deductible by the
person for acquisitions made during the tax period shall be determined as follows:
i) Full deduction of all the input tax attributable to taxable supplies.
ii) No deduction of any input tax which is directly attributable to other use (exempt
supplies).
iii) Deduction of input tax which is directly attributable to both taxable supplies and other
uses calculated according to the following formula.
A * B/C
Where;
A Total amount of input VAT payable by the person during the tax period on acquisitions
that relate partly to taxable supplies and partly for another use.
B Value of all taxable supplies made by the registered person during the period
C Value of all supplies made by the registered person during the period in Kenya.
This is applicable where the value of exempt supplies are more than 10% of total supplies.
NOTE:
a) If the fraction of B/C from the above formula for a tax period is more than 0.90 (90%),
the registered person shall be allowed an input tax credit for ALL of the input tax
comprising component A of the formula i.e 100% of A.
b) If it is less than 0.10 (10%), the registered person shall NOT be allowed any input tax
credit for the input tax comprising component A of the formula.
- The above is the proportional method used to restrict input tax claimable
If the ratio is > or = 10% but < or = 90%, restrict.
i.e Input tax claimable = Vatable Sales *A
Total supplies (standard rate + zero rate + exempt rate)
EXAMPLE 2
The following transactions were extracted from the books of Fanaka Traders for the month of
November 2021.
Sh.
Sales at standard rate 6,400,000
Purchases at standard rate 3,200,000
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Electricity bill paid 16, 000
Export sales 4,500,000
Exempt sales 2,400,000
Legal fees 48,000
Purchase returns 30,500
Additional information:
i) Fanaka Traders issued a debit note amounting to Sh. 320,000 for goods sold at
standard rate.
ii) Legal fees include Sh. 8,000 relating to VAT appeal against erroneous penalties.
iii) The business received a credit note from suppliers of Sh. 30,000 in respect of
goods supplied at standard rate
Transactions are stated exclusive of VAT where relevant. The standard rate of VAT is
16%
Required:
a) Value added tax payable by (or refundable to) Fanaka Traders for the month of
November 2021.
b) Comment on any information that you may not have used in your computations in
(i) above
EXAMPLE 3
For the year ended 31 December 2021, Bwiti enterprises had the following transactions
which included where applicable VAT at 16%.
Shs. ‘000’
Sales at standard rate 6,400
Sales at zero-rate 1,600
Computer purchase 1,200
Exported sales 720
Exempted sales 3,200
Purchases at standard rate 4,800
Purchases at zero-rate 1,000
Wages 3,000
Audit and Accountancy fees 400
Printing and stationary expenditure 600
REQUIRED
Calculate the VAT payable by Bwiti enterprises.
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EXAMPLE 4
Assia Ltd. is a merchandising company operating in Kenya. The following details of
transactions were extracted from the company’s records during the month of September
2022.
Ksh. “000”
Sales at standard rate 6,960,000
Exports to Eqypt 1,200,000
Purchases at standard rate 4,060,000
Purchases of delivery van oils and fuels 371,200
Repairs of office furniture 23,200
Audit fees 60,320
Wages 480,000
Purchase of stationery 55,680
Electricity bills not settled 46,400
Exempt supplies/sales 1,500,000
Legal fees 40,600
Purchase from traders not registered for VAT 134,000
Sales at zero rate 400,000
Additional information:
i) The value added tax accountant established that 20% of the standard rate
purchases were sold as standard rate sales
ii) Sales at standard rate included goods valued at Ksh.139,200 sold to a credit
customer who was declared bankrupt during the month.
iii) A customer returned goods sold at standard rate valued at Ksh. 29,000 to the
company and a credit note was issued immediately.
iv) Credit suppliers issued debit notes in respect to supplies at standard rate
amounting to Ksh. 580,000.
v) The accountant established that an invoice of Ksh. 180,000 from a foreign
supplier was not recorded in the books. The import duty for these goods was at a
rate of 20%
NB: Transactions are stated inclusive of VAT where applicable.
Required:
a) Output tax/Output VAT
b) Deductible input tax (VAT claimable)
c) Value Added Tax (VAT) payable if any.
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