VAT, GST and Sales Tax in Kenya

Summary

Name of the tax Value-added tax (VAT)
Date introduced 1-Jan-90
Trading bloc membership East Africa Community (EAC) Member
Member of the Southern African Customs Union No
Administered by Kenya Revenue Authority (www.revenue.go.ke)
VAT rates
Standard 16%
Other Zero-rated and exempt
VAT number format P000111111A
VAT return periods Monthly
Thresholds
Registration KES5 million (in 12 months)
Recovery of VAT by non-established businesses No

Scope of the tax

Since the enactment of a new VAT Act, which took effect 2 September 2013, VAT applies to the following transactions:

  • The supply of goods and services in Kenya by a taxable person
  • Taxable imported services received by a taxable person in Kenya to the extent that they relate to exempt supplies
  • The importation of goods from outside Kenya, regardless of the status of the importer (unless the importer is listed as zero-rated in Part B of the Second Schedule to the VAT Act)

The exportation of goods and taxable services is zero-rated if, sub­ject to the satisfaction of the Commissioner of Domestic Taxes, the supply takes place in the course of a registered person’s business.

Who is liable

VAT is paid by consumers of taxable goods and services. It is collected by registered taxpayers (traders) that act as the agents of the government. VAT on imported goods is collected by the Commissioner of Customs Services Department, while the Commissioner of Domestic Taxes collects local VAT and VAT on imported services.

VAT registration is dependent on the attainment of a turnover threshold of KES5 million with respect to all taxable supplies. Businesses that do not attain this turnover threshold are subject to turnover tax at a rate of 3% of their turnover up to a maximum turnover of KES5 million. After reaching this threshold, they must register for VAT. Within 30 days after becoming a taxable person, a person should apply to the Commissioner of Domestic Taxes to be registered in the prescribed manner. Businesses whose turnover is less than the registration threshold can volun­tarily apply to the commissioner for registration.

Registration procedures. The registration process involves a per­son making an online application for a Personal Identification Number (PIN). During this process, an entity is required to state its tax obligations including VAT.

Registration for all taxes is currently done online via the Kenya Revenue Authority (KRA) i-Tax portal (https://itax.kra.go.ke/ KRA-Portal/). On average, tax registration can take one to five days depending on the availability of information required for registration.

Group registration. The Kenyan VAT Act allows group registra­tion. However, in practice, group registration is allowed only under special circumstances.

Non-established businesses. A “non-established business” is a business that has no fixed establishment in Kenya. A foreign business that meets the registration requirements in Kenya and does not have a fixed place of business in Kenya is required to appoint a tax representative. A permanent establishment of a foreign business must register for VAT if it makes taxable sup­plies of goods or services.

Tax representatives. A person who is required to apply for VAT registration but who does not have a fixed place of business in Kenya should appoint a tax representative.

The registration of the tax representative shall be in the name of the nonresident person being represented.

The tax representative of a nonresident person shall:

  • Be a person normally residing in Kenya
  • Have the responsibility for doing all things required of the non­resident
  • With the nonresident person, be jointly and severally liable for the payment of all taxes, fines, penalties and interest imposed

Late-registration penalties. A penalty of KES200,000 or impris­onment for a period not exceeding two years (or both) is imposed in the event of late registration by traders who meet the turnover threshold.

Penalties apply to a range of other VAT offenses (see section on penalties below).

Reverse charge. Reverse-charge VAT is applicable on importation of taxable services to the extent it relates to the provision of exempt supplies. Registered persons are only required to account for reverse-charge VAT to the extent it relates to the provision of exempt supplies.

Digital economy. Taxation of electronic services is provided for in the VAT Act of 2013. “Electronic services” means any of the fol­lowing services, when provided or delivered on or through a telecommunications network:

  • Websites, web-hosting or remote maintenance of programs and equipment
  • Software and the updating of software
  • Images, text, and information
  • Access to databases
  • Self-education packages
  • Music, films and games, including games of chance
  • Political, cultural, artistic, sporting, scientific and other broad­casts and events, including broadcast television

A supply of electronic services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya.

If the place of business of the supplier is not in Kenya, the supply of the services shall be deemed to be made in Kenya if the recipient of the supply is not a registered person and the elec­tronic services are delivered to a person in Kenya at the time of supply.

Deregistration. A registered person may apply to the commis­sioner for deregistration under the following circumstances:

  • If the registered person ceases to make taxable supplies
  • If the registered person’s annual value of taxable supplies no longer exceeds the registration threshold

The commissioner shall, by notice in writing, cancel the registra­tion of a person in the following circumstances:

  • The person has applied for cancellation and the commissioner is satisfied that the person has ceased to make taxable supplies.
  • The person has not applied for cancellation but the commis­sioner is satisfied that the person has ceased to make taxable supplies and is not otherwise required to be registered.

The commissioner may cancel the registration of a person who is no longer required to be registered under the following circum­stances:

  • If the commissioner is satisfied that the person has failed to keep proper tax records
  • If the commissioner is satisfied that the person has failed to furnish regular and reliable returns
  • If the commissioner is satisfied that the person has failed to comply with obligations under other revenue laws
  • If there are reasonable grounds to believe that the person will not keep proper records or furnish regular and reliable returns

VAT rates

The term “taxable supplies” refers to supplies of goods and ser­vices that are not included in the First Schedule to the VAT Act, which specifies exempt supplies.

The following are the VAT rates in Kenya:

  • Standard rate: 16%
  • Zero rate (0%)

Supplies listed in the Second Schedule to the VAT Act are zero-rated, which means no VAT is charged on the sale, but input tax incurred in making the sale is deducted against output tax. All other goods and services are subject to VAT at the standard rate of 16%.

Examples of zero-rated supplies

  • Exportation of goods and taxable services
  • Goods and services supplied to export-processing zones
  • International transportation of passengers
  • Goods and services supplied to special economic zones
  • Supply of liquefied petroleum gas (LPG)

Zero-rated supplies to specific persons

  • Supplies to the Commonwealth
  • Supplies to other governments
  • Supplies to diplomats
  • Passenger baggage

The term “exempt supplies” refers to supplies of goods and ser­vices that are not liable to tax. Persons that make exempt supplies are not entitled to input tax deduction (see Section F).

Examples of exempt goods

  • Unprocessed agricultural products
  • Airplanes and other aircraft
  • Direction-finding compasses
  • Taxable goods for direct and exclusive use for the construction of tourism facilities of 50 acres or more
  • Garments and leather footwear manufactured in an export pro­cessing zone at the point of importation

Examples of exempt goods in transition

  • Motor fuel (regular and premium gasoline)
  • Aviation fuel
  • Gas oil
  • Natural gas

Examples of exempt services

  • Financial services
  • Insurance
  • Medical services
  • Agricultural and horticultural services and animal husbandry
  • Transportation of passengers (excluding transportation for hire)
  • Taxable services for direct and exclusive use for the construc­tion of tourism facilities of 50 acres or more
  • Entry fees into national parks and national reserves
  • The services of tour operators excluding in-house supplies

Option to tax for exempt supplies. Not applicable.

Time of supply

The time when VAT becomes due is called the “time of supply” or “tax point.” In Kenya, the tax point is the earliest of the follow­ing events:

  • The goods or services are supplied.
  • A certificate is issued by an architect, surveyor or a consultant.
  • An invoice is issued.
  • Payment is received for all or part of the supply.

Other tax points apply in a variety of specific situations.

Imports. The time of the supply for imported goods is either the date of importation, or the date on which the goods leave a duty suspension regime.

Recovery of VAT by taxable persons

A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. Input tax is claimed by deducting it from output tax, which is VAT charged on supplies made. Taxable persons must claim input tax within six months after incurring the expense.

Input tax includes VAT charged on goods and services purchased in Kenya and VAT paid on imports of goods.

Examples of items for which input tax is deductible
(if related to a taxable business use)

  • Professional fees
  • Utility costs

Nondeductible input tax. VAT may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur). In addition, input tax may not be recovered on certain business expenses.

Input tax recovery is restricted with respect to business expenses incurred on the following items:

  • Passenger cars or minibuses and the repair and maintenance thereof, including spare parts, unless the passenger cars and minibuses are acquired by the registered person exclusively for the purpose of making a taxable supply in the ordinary course of a continuous and regular business of selling and dealing in or hiring of passenger cars and minibuses
  • Entertainment, restaurant and accommodation services unless: — The services are provided in the ordinary course of the busi­ness carried on by the person to provide the services, and the services are not supplied to an associate or employee

The services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer

Partial exemption. VAT directly related to making exempt supplies is not recoverable. A registered person who makes both exempt and taxable supplies cannot recover VAT tax in full. This situation is referred to as “partial exemption.”

Under the VAT Act, if a taxable person supplies both taxable and exempt goods and services, only input tax attributable to taxable supplies may be recovered. The following are the attribution rules:

  • Input tax directly attributable to taxable goods purchased and sold in the same condition is deductible in full.
  • Input tax directly attributable to exempt outputs may not be deducted.
  • Attributable to both taxable and exempt supplies is partially deductible. The recoverable amount is calculated using a simple pro rata method based on the value of taxable and exempt sup­plies made.

If the exempt supplies are less than 10% of the total supplies, the input tax may be claimed in full. Where the exempt supplies constitute more than 90%, the registered person shall not be allowed any input tax attributable to taxable supplies.

Refunds. A taxable person may claim a refund of input tax in excess of output tax if the Commissioner General is satisfied that the excess arises from making zero-rated supplies.

Claims in excess of KES1 million must be accompanied by an auditors’ certificate. However, in practice, the VAT Department requires an auditors’ certificate for refunds in excess of KES200,000 to facilitate speedy processing.

The commissioner may refund tax where the tax has been paid in error.

A claim for tax paid in error must be filed within a period of one year (12 months) after the date on which the tax was paid.

VAT on bad debts accounted for and paid by a registered person can be claimed after a period of three years from the date of such supply or it can be claimed if the person liable to pay the tax has become legally insolvent. However, it must be claimed no later than five years after the date of the supply. If legal insolvency does not apply, evidence of the effort to recover the tax is required to support such claims.

Preregistration costs. On the date a person is registered, and for the next three months, the taxable person may recover preregis­tration input VAT paid on taxable supplies intended for use in making taxable supplies, provided that those purchases of taxable supplies were completed no more than 24 months before the date of registration.

Recovery of VAT by nonresidents

Kenya does not refund VAT incurred by a foreign business, unless the foreign business has a permanent establishment in Kenya and it is registered for VAT in Kenya.

Invoicing

VAT invoices and credit notes. A supplier of taxable goods and services must issue a tax invoice to the purchaser at the time of supply. Simplified tax invoices may be used. A credit note may be used to reduce the VAT charged on a supply of goods or services. Credit notes must show the same information as a tax invoice.

Proof of exports. Goods and taxable services exported from Kenya are zero-rated. How ever, to qualify for zero rating, exports of goods must be supported by evidence that proves the goods left Kenya. Suitable evidence includes the following documents:

  • A sales invoice
  • A bill of lading, road manifest or airway bill
  • A certified (endorsed) export entry (Form C17 [formerly Form C63])
  • For sugar and other excisable goods, a certificate of exportation signed by the Commissioner of Customs and Excise

A service exported out of Kenya means a service provided for use or consumption outside Kenya. However, to qualify for zero rating, exports of services must be supported by a copy of the invoice showing the sale of the services to the purchaser.

Foreign-currency invoices. Foreign-currency invoices are dealt with in the same way as invoices in local currency. The tax authorities do not require a standard exchange rate to be used to convert the value of foreign invoices into Kenyan shillings (KES). In practice, they accept the rate used by the taxable person, if the rate used is within the prevailing market exchange rates.

Electronic invoices. Registered persons must keep records, includ­ing copies of tax invoices in an electronic manner or otherwise. An invoice may be generated electronically or manually, provid­ed it meets the prescribed conditions of a valid tax invoice.

VAT returns and payment

VAT returns. The VAT tax period is one month. Returns must be filed by the 20th day after the end of the tax period. Payment is due in full by the same date. A “nil” return must be filed if no VAT is payable (either because the taxable person has made no supplies or because input tax exceeds output tax in the period).

If the normal filing date falls on a public holiday or on a weekend, the VAT return must be submitted on the last working day before that day.

VAT returns are now being submitted online.

A person may apply to the commissioner before the due date for submission of return for an extension of time to submit a return.

Special schemes. Not applicable.

Electronic filing and archiving. From 1 August 2015, the tax authority does not accept manual VAT returns. All returns must be filed electronically via the Kenya Revenue Authority (KRA) i-Tax portal.

Every registered person is required to keep records either elec­tronically or otherwise for a period of five years.

Annual returns. VAT returns are filed monthly. There is no provi­sion for annual VAT returns.

Penalties

The late submission of a return is subject to a penalty of KES20,000 or 5% of tax due, whichever is higher, plus late payment interest charged at a rate of 1% per month, simple interest. Other penalties for VAT offenses include the following:

  • Failure to keep, retain or maintain documents without reason­able cause for a reporting period: penalty of KES100,000 or 10% of the amount of tax payable under the Act to which the document relates for the reporting period to which the failure relates whichever is higher
  • Failure to display registration certificate: a fine of up to KES200,000 or a maximum sentence of two years’ imprison­ment, or both
  • Failure to apply for registration or deregistration: penalty of KES200,000 or a maximum sentence of two years’ imprison­ment, or both
  • Making a fraudulent claim for a refund of tax: two times the amount of claim
  • Unauthorized access to or improper use of tax computerized system: in case of an individual, maximum of KES400,000 or a maximum sentence of two years’ imprisonment, or both. In case of a body corporate, fine not exceeding one million shil­lings
  • Unauthorized access to or improper use of tax computerized system: maximum of KES400,000 or a maximum sentence of two years’ imprisonment, or both
  • Interference with tax computerized system: maximum of KES800,000 or a maximum sentence of three years’ imprison­ment, or both
  • Other offenses: maximum fine of KES1 million or a maximum sentence of three years’ imprisonment