|How VAT Works|
How VAT Works
Once you are registered you will be required to charge, collect and account for VAT on your taxable supplies and remit the tax to the Commissioner of Domestic Taxes. As a registered person you are also legally bound to submit online monthly returns (VAT 3's) with details of tax on goods and services charged to your customers (output tax) and tax on goods and services charged by your suppliers (input tax).
Whenever you make a taxable supply, the supply is your output and the tax you charge is your output tax. If you purchase taxable supplies for furtherance of your business the supply is your input and the tax you pay is your input tax.
In certain circumstances you may be refunded the excess of your input tax over output tax if the Commissioner is satisfied that such excess arises from Making zero rated supplies.
If you provide both taxable and exempt supplies, the input tax that is not directly attributable to the former is apportioned using the partial exemption formula as provided below:
Deductible Input Tax=Total value of taxable supplies (includes zero rated COMMON INPUT TAX
Value of total supplies
There are three tax rates as specified in the schedules to the VAT Act, which are:
16%: This is the general rate of tax and is applicable to most of taxable goods and taxable services.
12%: This is applicable to supplies falling under part II of the 1st schedule of the VAT Act eg. electrical energy and certain types of residual fuels and oils.
0%: This applies to certain categories of goods and services, which includes exports, agricultural inputs, pharmaceutical products, educational materials and supplies to privileged persons. The purpose of zero rating is to make the supplies cheaper as the dealers in these supplies are entitled to claim back any input tax incurred in the course of their business.
Zero Rating (0%)
The term zero-rating is used in the VAT Law to refer to supplies of goods and services that are subject to tax at the rate of zero per cent. Zero-rated supplies are deemed to be taxable supplies.
If you supply zero-rated supplies, you charge tax to your customers at 0%. The output tax is nil but you are allowed to recover any input tax that has been charged by your suppliers, and which goes into making of those supplies.
The zero-rating concept was introduced in the VAT system to enable exporters, manufacturers and suppliers of zero-rated goods and services to claim refund of tax paid on inputs incurred in dealing with zero-rated supplies. It was also meant to ensure that funds used by exporters, manufacturers, and suppliers of zero-rated supplies are not unnecessarily tied down in taxation.
The VAT Law provides for zero-rating of exported goods irrespective of the tax status of the goods. However Zero rating of services is restricted to taxable services only. The zero rating concept is a common phenomenon among countries where the VAT system is in operation.
Any goods or taxable services exported by a registered person shall be zero-rated if there is evidence of exportation consisting of: -
(i) A copy of sales invoice
As mentioned earlier, there are taxpayers who supply both taxable and exempt supplies. Zero-rated supplies are chargeable at the tax rate of zero (0%) while exempt supplies are business transactions on which VAT is not chargeable at either the zero rate or other rates. Exempt supplies are not taxable and do not form part of the taxable turnover. Persons who deal exclusively in exempt supplies are not liable to register and cannot claim input tax on these supplies.
Exempt supplies are divided into: -
(a) Exempt goods: -These are goods listed in the 2nd schedule ofthe VAT Act.
(c) Exempt Services: - are listed in the 3rd schedule of the VAT Act. All other services not in the list are deemed to be taxable.
These are services provided by persons who are normally not residents in Kenya and are not required to register for VAT in Kenya. They may also be services provided by Export Processing Zones (EPZS) for use or for consumption in Kenya.
When a taxable service is imported into Kenya, the importer must declare the taxable value and the VAT payable using the prescribed online form – VAT 7. Any importer of an imported service irrespective of his VAT registration status is liable to pay VAT on the imported service (Reverse VAT). To access online. The importer must register as a KRA online user to be able to file the VAT 7 used for declaration of the tax and generate an e-slip used in paying the tax to the KRA appointed banks. VAT on imported services is due and payable at the time when:
(i) the taxable service is received; or
(ii) An invoice is received in respect of the service; or
(iii) Payment is made for all or part of the service,
Whichever comes the earliest?
Tax paid on imported services for use in the registered person’s taxable business may be deducted as input tax in subsequent VAT 3 returns.
The VAT Act provides for taxpayers to claim refunds for different reasons.
1. Inventory/ Relief claims: - The Act allows you to apply for relief of tax paid on stocks, assets, buildings and civil works upon registration or where taxpayer’s exempt supplies become taxable provided that such buildings or civil works are constructed or such goods or assets or exempt supplies becoming taxable are purchased within twenty four (24) months prior to registration or exempt supplies becoming taxeble. However declaration of such tax must be made within three months from the date of registration in form-VAT 5 for the Commissioner's approval. Such input tax held in inventory should not be deducted in the VAT 3 return until the letter of approval from the Commissioner is received.
2. Zero Rated Supplies:- When you make zero-rated supplies you incur input tax but you have no output tax to off set the same from. The law allows you to claim refund of the excess input tax from the Commissioner.
3. Exports:- exports of all goods and taxable services are Zero Rated. Therefore both registered and non-registered exporters are allowed by the law to claim refund of input tax incurred in the cause of making such supplies.
4. Tax paid in error: - Sometimes you may pay tax in error due to various reasons e.g. use of wrong tax rate, over-declaration, and miscalculation among others. Tax paid in such circumstances is refundable if claimed by the person who paid it.
5. Bad debts:-If you charge tax on a supply and pay it to the Commissioner but your customer fails to pay you, you may claim the tax from the Commissioner, after a period of three years or immediately after that person becomes legally insolvent. However any claim on bad debts should be made within five (5) years.
6. Public Interest:- You are also entitled to a refund of tax that has been paid on goods where in the opinion of the Minister, it is in the public interest to remit the same.
NB: -All refund claims other than the inventory claims are made through form-VAT 4
The Minister for Finance may by order in the Gazette remit wholly or partly tax payable in respect of any taxable supply or class of taxable supplies if he is satisfied that it is in the interest of the public to do so.
Remission can be granted to and in respect of:
a). capital goods, excluding motor vehicles, of a total value of not less than
one million shillings per investment, imported or purchased locally for
new investments or the expansion of investments;
b) taxable goods for emergency relief purposes for use in specific areas and
within a specified period, imported or purchased locally by the
Government or its approved agent, a non-governmental organization or
a relief agency authorized by the Minister responsible for disaster
(i) the goods are for use in areas where a natural disaster or calamity
has occurred in Kenya; or
(ii) the goods are intended for use in officially recognized refugee camps
(iii) the goods are household utensil, food stuffs, materials for provision of
shelter or equipment and materials for health, sanitary or educational purposes; and,
(iv) in the case of a natural disaster or calamity, the importation or
purchase locally is made within six months or such further period, not
exceeding twelve months, as the Commissioner may permit in each
Provided that the goods imported or purchased under this paragraph
shall be of such quantities and subject to such limitations as the
Commissioner may impose.
c) goods, including motor vehicles and aircraft, and taxable services
imported or purchased by any company which has been granted an oil
exploration or oil prospecting licence in accordance with a production
sharing contract with the Government of Kenya and in accordance with
the provisions of the Petroleum (Exploration and Production) Act; and
d) capital equipment and machinery imported or purchased solely for use in
the manufacture of goods in a licensed customs bonded factory for
export only; and
e) official aid funded projects;
f) goods, including motor vehicles imported or purchased by any company
which has been granted a geothermal resources license in accordance
with a production sharing contract with the Government of Kenya and
in accordance with the provisions of the Geothermal Resources Act,
g) goods for official use of Kenya Armed Forces, goods supplied as ship
stores to the national carrier of any airline designated under an air
services agreement between the Government and a foreign government,
shade netting for agricultural or horticultural use of reinforced polyvinyl
chloride (PVC) or reinforced polyethylene for agricultural or
horticultural use in accordance with East African Community Customs
Management Act, 2004;
h) goods imported under bond for manufacture of exports, indirect exports,
goods free of import duty, goods for use in official aid-funded projects
and goods for use in manufacture of goods which are in turn supplied to
another manufacturer of goods under the Essential Goods Support
I) taxable goods and services supplied by a registered person for use in the
construction or expansion of private universities ( excluding student
hostels and staff housing) with the approval of the Minister, on the
recommendation of the Minister responsible for education;
J) taxable goods and services supplied by a registered person to a specific
project approved by the Minister, on the recommendation of the
Minister responsible for housing, for the construction of not less than
twenty housing units for low income earners, subject to such conditions as may be prescribed
The Minister may grant remission through a letter directing the Commissioner to remit tax pending publication of the Gazette notice. Such a letter shall be valid for 90 days.
K) The Commissioner may grant remission of additional tax in individual cases where he is satisfied that the remission is justified, provided that where additional tax exceeds Kshs 1,500,000 the remission shall be subject to prior approval of the Minister.
In order to further speed up the payment of refund claims, the Department has introduced certification of refund claims by auditors as contained in the Legal notice number 544 of 18th November 1997.
This requires that every application for refund or relief of tax of an amount of Kshs 1,000,000 and above be accompanied by an auditor's certificate showing that the application is true and the amount is properly refundable.
The Department has also introduced the payment of VAT Refunds through a Direct Credit System at the Central Bank of Kenya.