VALUE ADDED TAX (VAT) Cap 476

 VAT was introduced in Kenya in 1990.

 Replaced sales tax which had been in operation since 1973.

 VAT was introduced as a measure to increase government revenue through the expansion
of the tax base since sales tax. Sales tax was based on sale of goods at manufacturing
levels and at importation level only.

 Value added tax (VAT) is a tax on consumer expenditure.

 It can also be defined as a tax levied at every stage value is added to the cost of goods or
services supplied in Kenya or imported.

 Registered persons are required charged VAT at designated points and then remit the
amounts collected to the commissioner of DTD.

 Therefore registered persons only act as VAT agents in collecting and remitting the tax
since the tax is borne by the final consumer of goods and services.

Comparison between VAT and Sales Tax

VAT Sales Tax

i) Has a wider coverage since it covers both i) Less coverage since it covered only
goods and services manufactured goods

ii) Based on selling price ii) Based on cost price

iii) Easily separable from other costs iii) Not easily separable from other costs

iv) Input tax is claimed immediately by iv) Input tax claimed separately from the
offsetting it from the output tax commissioner of sales tax

v) Charged at various point value is added v) Charged at one point i.e. manufacturing

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vi) VAT has not cascading effects vi) Has cascading effect (i.e. tax on tax)
(i.e. tax added on another)

 In summary, VAT is levied on consumers but it is collected stage by stage through the
chain of production and distribution.
 Every value added amount attracts VAT. This means to overcome the undesirable effects
of sales tax (tax on tax) the liability at each stage is reduced by the tax already suffered
on purchases leaving the net payment to relate only to the value added at each stage.

Example:
ABC Ltd is a manufacturing business. During the month of April 2020, the company bought
raw materials for sh.4,640,000 (included VAT @16% ).
He later incurred processing cost of 25% of the cost. The company charges a markup of
25%.
The finished products were sold to KK Ltd. KK Ltd incurred another 20% of the cost on
storage and transport cost. The goods were sold at a mark-up of 30%.

Required
(i) Compute VAT payable by all traders
VAT Sales Tax

(i) Cost of Raw 100 x 4,640,000 4,000,000 Cost of Raw Materials 4,640,000
Materials 116

Add processing 1,000,000 Processing cost 25% 1,160,000

cost 25%
5,000,000 Cost price 5,800,000
Markup (25%) 1,250,000 Sales tax (16%) 928,000
Selling price 6,250,000 Selling price 6,728,000
VAT 16% 1,000,000 Mark-up 1,682,000
Selling Price income of VAT 7,250,000 Selling price inclusive of 8,410,000

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 sales tax
VAT Payable = Output – Input tax
= 1,000,000 – 640,000
= 360,000
(ii) KK Ltd
Cost of finished products 6,250,000 Cost of goods 8,410,000
Add storage & transport 20% 1,250,000 Storage and transport 1,682,000
7,500,000 Cost price 10,092,000
Mark-up 30% 2,250,000 Sales tax 16% 1,614,720
9,750,000 Selling price 11,706,720
VAT 126% 1,560,000 Mark-up 3,512,016
Selling price inclusive of
Selling price inclusive of VAT 11,310,000 (sales tax) 15,218,736

In the above case you note that VAT is tax on value added
e.g. in (i) above 16% (1,000,000) + 16% (1,250,000)
160,000 + 200,000
= 360,000

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Definition of Terms
(i) Input Tax
 This is a tax suffered on purchases, and includes tax charged on goods and services
supplied in Kenya.
 This also includes imports of goods and services.
 Input tax is not claimed on household goods, motor vehicles, furniture etc.

(ii) Output tax

 This is a tax charged on sale of goods and services supplied in Kenya. Therefore
VAT payable is the excess of output tax over input tax.
 However, In case, input tax exceeds the output tax, the excess input tax is carried
forward and off-set off against the output tax arising from the following month.
 Over, if this is a continuous feature of the business e.g. incase of suppliers of zero
rated goods, a claim for the refund should be made

RATES OF VAT
Standard Rate – 16%
This is the general rate of VAT
Zero rating (0%)
 This is taxing of supplies i.e. goods and services at zero rate (0%) percent i.e. VAT
implication is that a person who supplies goods at zero rate can recover input tax that
has been charged on his purchases.
 Zero rating was introduced to enable exporters and manufacturers of zero rated goods to
claim refund of tax rapid on inputs used in exportation and manufacture of zero rated
goods.
 This leads to reduction of the cost of Kenya exports and cost of production hence
making the goods and service competitive in the international market.
 Examples of zero rated supplies are; exports, agricultural inputs, pharmaceuticals,
educational materials hospital equipment etc.
Exempt supplies
These are non-Taxable supplies, and one need not register for VAT

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 Supply
In order for a VAT to accrue on a transaction supply must take place.
Supply means:
 The sale, supply or delivery of taxable goods to another person.
 The sale or provision of taxable services to another person e.g. provision of free legal
services to your local church.
 The appropriation by a registered person of taxable goods or services for his own use
outside of the business e.g. drawing of goods/ or defending yourself in a case in a
court of law.
 The making of a gift of any taxable goods or taxable service
 The letting of taxable good on hire, leasing
 Any other form of transfer of taxable goods.

Tax Invoice
 This is an invoice issued whenever supply of taxable goods or services is made.
 The tax invoice is issued to the purchaser within 14 days of completion of the supply.
 It is important to both the customer and the seller for VAT accounting and reclaiming
purposes.
 Payment of VAT – Due by 20th day of the month following month which the tax
become due.

Time of supply (tax point)

 Point when (VAT) is charged VAT becomes due and payable at the time of supply.
 The tax is due and payable at the earliest of the time.
(i) When goods are supplied to the purchaser or
(ii) An invoice is issued in respect of the supply or
(iii)Payment is received for all or part of the supply, or
(iv) An architect surveyor or any person acting as a consultant or in a supervisory
capacity in respect of services provides a certificate of completion.
However, when goods or services are supplied on a continuous basis (metered supplies) the
tax is chargeable from the date of the first determination or first meter reading.

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In case of imports, VAT is due at the time of customs clearance of the goods for home use. If
the food are moved to a warehouse the VAT is due at the time of removal for home use.

In case of personal use of goods/services the tax point is the time when the goods or services
are taken or set aside for this purpose.
In conclusion, one cannot delay accounting for VAT on grounds that he has not received
payments).

REGISTRATION
 Only registered persons are required to charge VAT.
 Persons who supply taxable goods and services are supposed to apply for registration by
completing and submitting an application form – VAT 1.
 After the application is processed, one is issued with a certificate of registration in
prescribed form – VAT 2.
 The date the trader collects or receives the registration certificate is the effective date of
registration. This is the time the trader should start charging VAT on all his taxable
supplies.
 If certificate is sent by registered mail the effective date of registration is the 7 th day after
posting.
 For a person to qualify for registration s/he must have attained or expect to attain a
taxable turnover of sh 5 million.

TURNOVER TAX
 Turnover threshold are designed to exclude small businesses from the burden of
collecting and accounting for VAT.
 The registration threshold has been changing over the years. The registration
threshold as at 2022 is sh. 5M. Otherwise any business whose turnover is less than
sh. 5m shall be required to register for turnover tax and a tax of 3% of the annual
turnover (Finance Act, 2023).
 Such traders are required to pay that tax which is final tax. The trader is not required
to file VAT returns.
 The business will only maintain cashbook, sales ledger, purchases ledger and bank
statement which may be verified by domestic taxes department if need arises.
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DEFINITION OF TERMS
Disaggregation
There is a provision meant to prevent a business from being artificially split into small units
thereby avoiding VAT registration because one or more units fell below the turnover level
(limits)
Deregistration
This is where the commissioners removes the registered taxable person from the register of
taxable persons due to:
1) Ceased to make taxable supplies
2) Value of taxable supplies in 12 months does not exceed sh.5 million and the supply is
not expected to increase in the next one year.
3) Death, insolvency of the registered person
4) Goods becoming non-taxable, change of trading names and legal incapacitation.

The minimum amount does not apply to a person making or who expects to make the
following supplies and the person in required to register irrespective o the value of supplies.
(a) Designated persons (dealers) who deal in designated foods such as jewellery, pre-
recorded music cassettes, timber and saw millers.
(b) Persons how sell four or more motor vehicles in any one year
(c) Persons who deal on motor vehicle parts and accessories.
(d) Persons who deal in household or domestic electric or electric appliances and
apparatus
(e) designated services contained in the fourth schedule of VAT Act which include
(i) Accounting services including any type of auditing/bookkeeping company
secretarial, engineering, architectural, and other consulting and agency services.
(ii) Legal and arbitration service
(iii)Services supplied by auctioneers, estate agents and valuers
(iv) Clearing and forwarding services
(f) Voluntarily Registration
Designated goods are those goods which are taxed at all levels of distribution chain
(that is at retail level.)

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Advantages of Registration
(i) To enable one to claim input tax of zero rated persons
(ii) To enjoy a soft loan from in case of cash transactions for instance by supermarkets
(iii) To attract large manufacturers.

Zero Rate
VAT is chargeable but at zero rate
Input tax claimable
Needs to Register for VAT

Example
Hospital equipment
Medicaments – artificial teeth joints, x-rays, ambulances
Fire fighting equipment
Agricultural goods – plough, milking machines
School equipment
Exports and zero rated.

Exempt supplies
VAT not chargeable
Input tax not claimable
Need not register for VAT

Examples of exempt supplies

Mammals – Hive horse, cats, dogs, and pets

Birds – ostrich, ducks, chicken
Fish – Tilapia,
Reptiles – snakes and its venom crocodiles etc.

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RATES OF VATE

There are three (3) classification of VAT rates

(i) General or standard rate – 16%

(ii) Zero rates – goods are taxable at (0%) Zero per cent – 0%

Obligations of a taxable person (tax pages) provision of VAT Cap 476

(i) To apply for registration
(ii) To charge VAT at the right rate on all his taxable supplies
(iii) To display your VAT Certificate of registration in a clearly visible place in your
business premises.
(iv) To issue a tax invoice for every supply made
(v) To submit monthly VAT returns – by 20th day of the month following the month of
charging VAT (sale) to VAT Dept.
(vi) To keep records and books upto date and retain them for 5 years.
(vii) To avail records to authorized officer of the Dept at any reasonable time for inspections
(viii) To pay by 20th day any VAT due to the department of VAT, according to your
callulative in the monthly return (VAT 3)
(ix) To provide the dept’s officers with any information pertaining to your business and
access to your business premises whenever required to do so.
(x) To notify the commissioner of any changes affecting your business in case of charge in
location or change of provision of good/services.

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 Accounting for VAT
 A registered person is required to charge, collect and account for all VAT on all his
taxable supplies and remit the tax to the commissioner.
 To submit monthly returns (VAT 3) containing details of tax on supplies charged on their
customers (output tax) and tax suffered on goods and services charged by their suppliers
(input tax).
VAT = Output tax – Input tax payable.
Exempt supplies
 Remember, exempt supplies are business transactions on which VAT is not chargeable at
either zero rate or other rates.
 Exempt supplies are not taxable and suppliers do not charge VAT at either zero rate or
any other rate.
 Exempt supplies are not taxable and do not form part of the taxable turnover.
 Persons dealing exclusively in exempt supplies are not liable to register and cannot claim
input tax on those suppliers.
However where a registered person (s) provides (makes) both taxable and exempt supplies
(non-taxable) the input tax that is not directly attributable to the taxable supplies is
apportioned i.e. he can only deduct that part of his input tax which is attributable to taxable
supplies i.e. he is required to apportion the turnover accordingly.
Advantages of VAT
 It is based on value and therefore adjusts automatically to the effects of inflation
 VAT is collected in stages, therefore tends to reduce tax evasion
 VAT is charged on expenditure therefore spreads tax burden
 VAT improved tax administration, many different services were brought under one tax
system.
Disadvantages
 Many statutory records are complicated and costly to maintain
 Most taxpayers are illiterate and they do not follow the required procedure
 Enforcement of VAT requires high caliber staff for continuous audit
 It can lead to high tax evasion if the suppliers collude through false involving
 It is likely to fuel inflation
 VAT is discriminative since it doesn’t distinguish between the poor and rich.

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VAT REFUND
VAT can be refunded if
1) Input tax exceeds output tax and this is a common feature of business especially
incase of dealer of zero rated supplies.
2) VAT has been paid in error
3) Where a debt of taxable person has remained unpaid for 3yrs and above
4) When a debtor of a taxable person has been declared bankrupt or influent.
Nos. 3 & 4 are cases of bad debt relief.

RESTRICTION ON INPUT TAX CLAIM

To determine the deductible input tax, a taxable person may use the following method:

(A) Proportional Method

Deductable input tax = Value of taxable foods (This includes Zero rated goods) x Input
Tax
Value of total supplies (this includes exempt)

NB: If input tax of non-taxable supplies (exempt supplies) is less than 5% of the total input
tax then the whole of the input tax suffered will be claimable against the output tax therefore,
restriction of input tax will not be applied.

(B) Allocation Method

Stage 1
 Trace the input tax relating to supplies purchased and sold at the same state (rate) i.e.
any input tax directly attributable to taxable supplies should be deducted.
 No deduct of any input tax which is directly attributed to exempt supplies
 Apportion the input tax on inputs use din making both taxable and exempt supplies
which cannot be directly identified in the mix by applying the proportional method.
Example
Mr. Waki has been operating as a whole sales in Nairobi. The following details were
available for the month ended 31 Dec 2004.

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 Sh.
Sales at standard rate 20,000,000
Sales at zero rate 10,000,000
Exempt sales 12,000,000
Export sales 6,000,000
Purchases at standard rate 18,000,000
Purchases at zero rate 8,000,000
Salaries and wages 9,000,000

Required
(i) Compute VAT payable
(ii) Suppose 25% of purchases at Std rate were sold at Std rate compute VAT payable

Mr. Waki
2004 VAT Computation

Output Tax
Nature of supply Supply VAT VAT
value Rate Thereon
Std rate 20,000,000 16% 32,000,000
Zero rate (10m +6m) 16,000,000 0% 0
Exempt 12,000,000 -
3,200,000
Input Tax
Nature of supply Supply VAT VAT
value Rate Thereon
Std rate 18,000,000 16% 28,200,000
Zero rate (10m +6m) 8,000,000 0% 0
28,000,000

Deductible
Input tax claimable = Table supplies (including zero rated) x input tax
Total supplies
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 = 36,000,000 x 2,880,000
= 480,000,000

= 2,160,000
VAT payable = 3,200,000 – 2,160,000
= 1,040,000
Method (b) (Allocation Method)

Input tax relating to purchases at Std rate

Sold at Std rate = 18M x 25% = 4.5M X 16% = 720,000

Input tax in the mix = 2,880,000 – 720,000

= 2,160,000

Apply proportional Method

NB. 20,000,000 x 25% = 5,000,000

= 31,000,000 x 2,160,000 = 1,557,209

43,000,000

Deductable input tax = 1557209 + 720000

=2,277,209

VAT payable = 3200,000 – 2,277,209

= 922,791

Input tax paid on the following items is not deductible from output tax
(i) Fuel and oils for use in motor vehicles
(ii) Passenger cars and minibuses, bodies, parts and services for the repair and maintenance
of such vehicles.

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(iii) All motor vehicles bodies, pats, and services for the repair and maintenance of such
vehicles, except where the foods and services are used primarily for the supply of
taxable foods and services.
(iv) Furniture, fittings and ornaments or decorative items in buildings other than items
permanently attached to buildings
(v) Household or domestic electrical appliances with some exceptions
(vi) Entertainment services
(vii) Restaurant services
(viii) Returnable containers including returnable crates, bottles, and other similar taxable
containers used for packaging beverages.
(ix) Returnable cylinders and other similar taxable returnable containers used in packing
liquid gases.
(x) Staff houses and other similar establishment for the welfare of staff.

Failure to submit VAT returns on the due dates;

A penalty of Sh.10,000, and WEF 11.6.04, a penalty of Sh.10,000 or 5% of the tax due
whichever is higher.
And an additional tax of 2% compound per month on unpaid tax. The 2% is not charged on
the penalty.

RIGHTS OF A REGISTERED TRADER

Under the VAT Act, the registered trader has the following rights:
(i) To deduct allowable input tax
(ii) To get refund where input tax exceeds output if it’s a continues feature of the business
– e.g. in case it deals with zero rated (supplies), services or after is airing heavy
capital investment e.g. industrial building.
(iii) To get relief of stock in trade as at the time of registration.
(iv) To get relief or refund on capital good (including buildings) acquired or put up within
12 months prior to the date of registration
(v) To get a refund of bad debt
- This is where the debt remains outstanding for 3 years and more or a trader is
declared bankrupt in his rent be claimed within 5 years.

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 (vi) To defer payments of tax due to a date not later than 20th day of the month succeeding
that in which tax is charged
(vii) To request for reconsideration of an assessment
(viii) To appeal to the tribunal
(ix) To demand that every authorised officer indentifies himself or herself.
(x) Have a free access to the commissioner or any other authorised officer
(xi) To expect that information obtained in the course of duty by the VAT officers shall be
treated in confidence.
(xii) To expect minimum interference
(xiii) To be given assistance in understanding their legal obligations

POWERS OF THE COMMISSIONER

The commissioner general is the commissioner for VAT Dept. however, he may delegate
these powers to another officer who will be referred to as the commissioner for VAT.

The following are the powers of the commissioner:

(i) To enter business premises without any warrant during any normal working hours or
at any time when there is evidence of fraud.
(ii) To examine businesses books, documents and records.
(iii) To require security for VAT liability
(iv) To levy way of money distress on foods and chattels
(v) Take samples
(vi) To have priority of tax in bankruptcy, winding up, receivership and distribution of
assets in death.
(vii) To require production of any documents useful for investigations with regard to
assessment, refund, and offences.
(viii) To apply for an order to charge the VAT debt against Land or property owned by a
registered
(ix) To assess the amount of tax due in case of failure by the taxable person to do so
(x) To collect the tax due.

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Exempt services
The following services are exempt for VAT purposes:-
1. Financial services excluding,
 Financial and management advisory services
 Safe custody services
 Executorship & Trustee service

2. Insurance and reinsurance, services, educational and training services offered to students.
3. Medical, veterinary, dental and nursing services

4. Sanitary and pest control services rendered to domestic households.

5. Agricultural animal husbandry, and horticultural services
6. Social welfare services provided by charitable organization
7. Burial and cremation services. Note any services renders after burial will be subject to
VAT.
8. Transpiration of passengers by any means except where the means of conveyance is
hired, chartered or leased.
9. Renting, leasing, hiring or letting of land and residential buildings
10. Postal services provided through supply of postage including rental of post boxes and
mail bags and any subsidiary service thereto.
11. Community, social and welfare services provided by local authority.
12. Insurance agency, insurance brokerage, stock exchange brokerage adhere and coffee
brokerage services.
13. Hiring, leasing or chartering of fords but excluding chartering of aircrafts and hiring of
buses (taxable WEF 1.01.3012) Note: Chartering of aircrafts for use outside Kenya are
services exported out of Keya and therefore zero rated.
 Leasing of aircraft is exempted
14. Tour operation and travel agency services
15. Entertainment services, conducted by educational institutions sports, games or cultural
performance under ministry of culture and social service etc.
16. Car park services provided by local authorities and by an employer to his employees on
the premises of the employer.
NB. Any other services not included in the above are taxable supplies.
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Value added tax tribunal
 Established by the minister
 Consist of chairman and two or more members appointed by the minster
 Minister may give guideline on the procedure to be followed in hearing appeals.
 Any person aggrieved by commissioner’s decisions may appeal within 30 days of
being notified of the decision.
Conditions for appeal to be heard
1) Submit all his monthly returns
2) Pay all taxes as computed by him in his returns.
3) Pay 50% of the tax assisted by the commissioner before the appeal is registered.

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