VAT (Value Added Tax)
16% tax on goods and services in Kenya. Comprehensive guide to VAT registration, filing, compliance, zero-rated goods, exempt supplies, and input tax credits.
What is VAT?
Understanding Value Added Tax in Kenya
Value Added Tax (VAT) is an indirect tax charged on the supply of goods and services in Kenya. At 16%, VAT is collected at each stage of the supply chain and ultimately borne by the final consumer. Businesses registered for VAT act as tax collectors, charging VAT on their sales and claiming back VAT paid on business purchases.
Who Must Register?
Businesses with annual turnover exceeding KSh 5 million must register for VAT. Registration is voluntary for smaller businesses and can provide tax advantages.
16% Standard Rate
Standard VAT rate of 16% applies to most goods and services. Some items are zero-rated (0%) or exempt from VAT with specific conditions.
Monthly Filing
VAT returns must be filed monthly by the 20th of the following month via iTax, along with payment of any VAT due to KRA.
Input Tax Credits
Registered businesses can claim input tax credits for VAT paid on business purchases, reducing their overall VAT liability.
VAT Calculator
Calculate VAT inclusive/exclusive amounts, determine input tax credits, and understand your VAT obligations with our comprehensive calculator.
VAT Categories & Rates
Standard, zero-rated, and exempt supplies
Standard Rate
Most goods and services
- General merchandise and retail goods
- Professional services and consultancy
- Restaurant meals and accommodation
- Motor vehicles and spare parts
- Electronics and appliances
- Construction services
- Telecommunications services
- Entertainment and leisure services
Zero-Rated
Essential goods and exports
- Basic food items (bread, milk, sugar)
- Medicines and medical equipment
- Educational materials and books
- Agricultural inputs and fertilizers
- Exports of goods and services
- Petroleum products (some categories)
- International transport services
- Biogas and solar equipment
Exempt
Cannot claim input tax
- Financial services (banking, insurance)
- Medical and dental services
- Educational services
- Residential property rentals
- Postal services
- Public transport services
- Betting, gaming, and lotteries
- Religious and charitable activities
Key Differences Between Categories
- Standard Rate (16%): VAT charged on sales, input tax credit claimable
- Zero-Rated (0%): No VAT on sales, but input tax credit still claimable
- Exempt: No VAT on sales, and no input tax credit claimable
- Mixed Supplies: Businesses with both taxable and exempt supplies have restrictions on input tax claims
VAT Registration
When and how to register for VAT
Mandatory Registration
Turnover Threshold
Annual turnover exceeds KSh 5 million in any 12-month period. Registration must be done within 30 days of exceeding the threshold.
Expected Threshold
Reasonable expectation that turnover will exceed KSh 5 million in the next 12 months based on business projections.
Import Requirements
Businesses importing goods exceeding KSh 2 million annually must register for VAT regardless of local sales turnover.
Professional Services
Certain professional services providers may be required to register regardless of turnover level based on KRA guidelines.
Voluntary Registration
Business Credibility
VAT registration enhances business credibility and enables you to supply to other VAT-registered businesses who need VAT invoices.
Input Tax Recovery
Claim input tax credits on business purchases, potentially improving cash flow if you pay significant VAT on business inputs.
Export Benefits
Zero-rated exports allow full input tax recovery, making VAT registration beneficial for export-oriented businesses.
Future Planning
Register early if you expect to exceed the threshold soon, avoiding last-minute compliance rushes and potential penalties.
Registration Requirements
- KRA PIN Certificate
- Business Registration Certificate
- ID Copy (Directors/Owners)
- Bank Account Details
VAT Filing & Compliance
Monthly filing requirements and procedures
Maintain VAT Records
Keep detailed records of all sales and purchases with VAT invoices, tax invoices, and import documentation. Records must be maintained for at least 5 years.
Calculate Monthly VAT
Calculate output VAT on sales, input VAT on purchases, and determine net VAT payable or refundable for the month.
File VAT Return
Submit monthly VAT return via iTax portal by the 20th of the following month. Include all sales and purchase details with supporting schedules.
Pay VAT Due
Pay any VAT due by the 20th deadline. Use bank, mobile money, or iTax payment options. Late payment attracts penalties and interest.
Claim Refunds
If input VAT exceeds output VAT, file for refund through iTax portal. Refunds are processed after verification and may take 30-90 days.
Annual Reconciliation
Reconcile annual VAT position and ensure all monthly returns are consistent. Address any discrepancies through amended returns if necessary.
Important VAT Deadlines
VAT Records & Documentation
Essential record-keeping requirements
Required Records
Sales Records
All tax invoices issued, cash sales receipts, credit notes, and export documentation with VAT details clearly shown.
Purchase Records
Tax invoices received, import documentation, receipts for business expenses, and input tax supporting documents.
VAT Returns
Copies of all filed VAT returns, payment confirmations, correspondence with KRA, and any amendments made.
Supporting Documents
Bank statements, accounting records, contracts, and any other documents supporting VAT transactions and claims.
Best Practices
Digital Storage
Scan and backup all physical documents. Use cloud storage or secure digital systems to prevent loss of critical records.
Monthly Reconciliation
Reconcile VAT records monthly to identify discrepancies early and ensure accurate return filing.
Sequential Numbering
Use sequential numbering for all tax invoices and maintain a register to track all issued documents.
5-Year Retention
Keep all VAT records for at least 5 years as required by law. Organize by year and month for easy retrieval.
Common VAT Issues & Solutions
Avoid these costly VAT mistakes
Incorrect VAT Invoicing
Missing VAT details, incorrect VAT amounts, or non-compliant invoice formats can lead to input tax credit denials and penalties.
Solution: Ensure all tax invoices include VAT registration number, VAT amount, and comply with KRA format requirements.
Mixed Supply Errors
Incorrectly apportioning input tax credits between taxable and exempt supplies can result in overclaims and penalties.
Solution: Use proper apportionment methods and seek professional advice for complex mixed supply situations.
Late Filing & Payment
Missing the 20th deadline for VAT returns and payments attracts significant penalties and interest charges that compound monthly.
Solution: Set up automated reminders and file returns early to avoid last-minute technical issues.
Inadequate Record Keeping
Poor documentation makes VAT audits difficult and can result in disallowed input tax credits and additional assessments.
Solution: Implement proper filing systems and maintain complete VAT documentation for all transactions.
Frequently Asked Questions
Expert answers to common VAT questions
Can I claim input VAT on all business purchases?
Not all business purchases qualify for input VAT credits. You can only claim VAT on purchases directly related to your taxable supplies. Purchases for exempt supplies, personal use, or entertainment generally don't qualify. The purchase must be supported by a valid tax invoice from a VAT-registered supplier.
What is the difference between zero-rated and exempt supplies?
Zero-rated supplies have VAT at 0% but you can still claim input VAT credits on related purchases. Exempt supplies have no VAT and you cannot claim input VAT credits. For example, exports are zero-rated (good for input credits) while financial services are exempt (no input credits allowed).
How long does VAT refund processing take?
VAT refunds typically take 30-90 days to process, depending on the amount and KRA's verification requirements. Large refunds may take longer as they undergo more detailed scrutiny. Ensure your refund application is complete with supporting documentation to avoid delays.
Can I voluntarily deregister from VAT?
Yes, if your annual turnover falls below KSh 5 million and you expect it to remain below this threshold, you can apply for voluntary VAT deregistration. However, consider the business implications as you'll lose the ability to claim input VAT credits and may affect your credibility with VAT-registered customers.
What happens if I charge wrong VAT rates?
If you undercharge VAT, you're still liable for the correct amount to KRA. If you overcharge, you must refund the excess to customers or remit it to KRA. Always verify VAT rates for your specific goods/services and issue credit notes to correct errors promptly.
Do I need to charge VAT on advance payments?
Yes, VAT is due when you receive advance payments, not when goods are delivered or services rendered. Issue a tax invoice for the advance payment and account for the VAT in that month's return. When you make the final supply, adjust for the VAT already accounted for.