The government collects revenue from its residents as well as applicable non-residents through taxation for purposes of running its operations. Kenya Revenue Authority (KRA), is a legalised body mandated to collect taxes on behalf of the Government of Kenya. VAT is one of the most significant revenues collected by the government. In this article, we are going to discuss more about VAT and how it works.

What is VAT?

VAT is a consumption tax imposed whenever a value is added on applicable goods and services at each stage of the supply chain from production to consumption. It is levied on the use of taxable products and services supplied or imported into Kenya. The tax is collected by registered persons at designated points in the supply chain and remitted to KRA.

Only registered traders with an annual turnover of KShs. 5 million and above are required to charge VAT. However, there are instances where a person with less than KShs. 5 million is allowed to register on a voluntary basis. The supply or importation of goods or services that are designated as exempt are not subject to VAT and as such, their sale does not constitute a taxable supply for VAT registration purposes.

VAT Rates

There are 3 VAT rates: the general rate at 14%, 8% on petroleum products and zero rate. Zero-rated supplies are taxable at the rate of 0% and the related input tax thereof deductible. Registered persons exclusively selling zero rated supplies are entitled to refund of the input tax paid in furtherance of the business.

Registered persons charge VAT at every stage along the supply line, and the final consumer usually bears it. A VAT account is traditionally maintained. It is a ledger which records VAT on goods and services charged to customers (output tax), and on products and services billed to a business supplies (input tax).

The difference between output tax and input tax is payable to KRA only where the output tax is more than the input tax. Conversely, when input tax is greater than output tax, the difference is carried forward to the next month as tax credit deductible against the output tax of that month. However, a person claiming input tax will only be allowable as a deduction as long as the registered supplier has made a corresponding declaration of the output tax in his return.

VAT on Imported Services

In the case of imported services, the Kenyan importer is required to account for reverse VAT to the extent the imported service is used partly to make exempt supplies. In that regard, an importer of services who makes only taxable supplies would not be required to account for reverse VAT. Nevertheless, a person who imports services and is not registered for VAT is required to charge and account for reverse VAT to the Commissioner.

Any non-resident person who carries on business in Kenya which qualifies for VAT registration but does not have a fixed place of business in Kenya is required to appoint a resident person as his or her tax representative for VAT obligation. In case such a person fails to appoint a tax representative, the Commissioner is authorised to appoint any person as a tax representative of such non-resident person for purposes of compliance with the tax laws on his behalf. A non-resident person who qualifies to register for tax obligation in Kenya and fails to do so commits an offence subject to a penalty of KShs. 200,000 or imprisonment, upon conviction, for a term not exceeding 2 years.

Deregistration of VAT

A person who has been registered for VAT and is no longer required to register for reason that his turnover has fallen below the threshold or his supplies are no longer taxable or for any other reasonable cause, may apply in writing to the Commissioner for deregistration. The Commissioner upon being satisfied that the applicant qualifies for deregistration will deregister the person from the VAT obligation. A deregistered person shall not be required to comply with VAT requirements anymore. 

As long as a person is registered for VAT obligation, even if he does not carry on any trading activities is required to file a return on or before 20^th of the following month. Failure to comply is an offence subject to a penalty of Ksh 10,000 for every tax period failure occurs. This is in addition to other penalties prescribed in law.

By Phanice Munandi

KRA Tax Education