Value Added Tax (VAT) is a key source of revenue for the Kenyan government. It is administered by the Kenya Revenue Authority (KRA) and is applied on the consumption of taxable goods and services at each stage of production and distribution. This tax is collected by registered traders and remitted to KRA.
Who Should Register for VAT?
Businesses must register for VAT if their annual turnover exceeds KShs. 5 million. However, voluntary registration is allowed for businesses below this threshold. VAT does not apply to exempt supplies, and such sales do not count as taxable supplies for VAT registration purposes.
VAT Rates in Kenya
There are three VAT rates:
- 14% – Standard rate
- 8% – Applicable to petroleum products
- 0% (Zero-rated) – For exports and certain specific items
Zero-rated supplies allow businesses to claim input VAT, making them eligible for refunds.
How VAT Works
Registered traders charge VAT on their sales (output tax) and claim credit for VAT paid on their purchases (input tax). The difference is paid to KRA:
- If output tax > input tax, the balance is payable to KRA
- If input tax > output tax, the balance is carried forward as a tax credit
Only input tax declared by a registered supplier is deductible. Cross-matching of returns is enforced to ensure compliance.
VAT on Imported Services
Imported services are subject to reverse VAT. Key rules include:
- A VAT-registered importer making only taxable supplies is not required to account for reverse VAT.
- A non-registered importer must account for reverse VAT on all imported services.
- Non-resident persons without a fixed place of business in Kenya must appoint a resident tax representative. Failure to do so may lead the Commissioner to appoint one.
Offenders who fail to register for VAT face a KShs. 200,000 fine or imprisonment of up to 2 years.
Learn more here:
Who is a tax agent?
Deregistration from VAT
A business may apply for deregistration if:
- Its turnover drops below KShs. 5 million
- It ceases making taxable supplies
- Any other valid reason applies
Upon approval, the business will no longer be required to comply with VAT regulations.
VAT Filing Obligations
Even without trading activity, all registered VAT taxpayers must file a monthly return via iTax by the 20th of the following month. Failure to file attracts a KShs. 10,000 penalty per tax period, in addition to other legal consequences.
Refer to the VAT Act (Revised 2021) for full legal provisions.
Conclusion
Understanding Value Added Tax in Kenya is essential for compliance and smooth business operations. Whether you’re starting a business or already trading, ensure you’re aware of your VAT obligations to avoid penalties and maintain tax health.
