WHAT IS VAT
VAT is a consumption tax (indirect Tax) charged on:-–
Local Sales and Importation of goods and services that are taxable.
Registered traders play the role of agents while Consumers are the actual Taxpayers.
VAT Law is contained in the VAT Act Cap 476 of the Laws of Kenya.
- Minimum turnover requirement for Registration is Kshs 3 million per year but Kshs. 5million from 1st Jan 2007.
- Some businesses are however registered irrespective of their turnovers e.g. dealers in motor vehicle spare parts, electronics, timber, jewellery and professional services e.g accountancy, computer services, advertising, clearing & forwarding etc.
- A taxpayer can also register voluntarily even if the turnover is below threshold required.
RATES OF TAX
- There are two (2) rates of Tax;
- 16%...The general rate charged on taxable goods and services otherthan Zero-rated supplies.
- 0%.... For Zero-rated supplies i.e. Exports, Agricultural Machinery, Farm inputs, Pharmaceutical products etc.
ACCOUNTING FOR VAT
- Accounting of VAT refers to computation, keeping of supporting records and declaration of the tax.
- VAT is accounted for by;
- Issuing tax invoices/Cash sale receipts;
- Keeping of records and evidence thereof:
- Input tax deduction and evidence thereof.
- Input tax deduction means claiming back VAT charged on purchase of stock, raw materials, assets & other expenses as long as they are directly attributable to the production of taxable goods and services. Input tax should be claimed within 12 months from the date of the purchase invoice. However the following input tax is prohibited from deduction:-
- Oils for motor vehicles
- Passenger cars except in car hire.
- Loose furniture & fittings except in hotels and restaurants where deduction may take place with prior approval of the Commissioner.
- Domestic electrical/electronic appliances except in hotels and restaurants where deduction may take place with prior approval of the Commissioner.
- Entertainment services
- Hotel & restaurant services
- Accommodation services
- Supplies to staff housing and other similar establishments for staff welfare.
NB: Input tax is however deductible where the afore-mentioned goods are purchased as stock-in-trade
Tax point means when tax becomes due and payable to the Commissioner.
- Tax is due and payable when:-
- The Supply takes place;
- An invoice is issued;
- Part or full payment for the supply is made;
- A certificate of completion is issued (in case of construction industry).
Whichever comes earliest of the four.
A tax payer can however defer payment of tax upto 20th day of the month following that of sale.
SUBMISSION OF RETURNS
- The due date for submitting returns is on or before 20th of the month following that which the sales were made. Where 20th falls on a weekend, or on a Public Holiday, returns should be submitted on or before the last working day before the 20th ;
- Failure to submit a return, late submission of returns or submission of payment returns without payment of the tax due is liable to a default fine of Kshs 10,000 or 5% of tax due, whichever is higher. An additional compounded interest of 2% per month is also levied on the amount remaining unpaid after the due date.
OFFENCES AND PENALTIES
- Once registered, a taxpayer should avoid committing offences like.
- Failure to display the VAT certificate
- Failure to issues tax invoices
- Declaring false returns
- Failure to submit or late submission of returns.
Offences committed under the VAT Act, some of which are listed above,
are subject to heavy fines and
REFUNDS AND REMISSIONS
- A taxpayer may be granted refund of tax on:
- Inventory & assets held at the time of registration.
- Tax paid in error
- Tax on bad debts
- Excess input tax arising from dealing in Zero rated supplies.
- VAT incurred on capital investments where input tax deducted is Kshs one million or more.
- Excess credit arising from withholding VAT system.
- The Minister of finance may remit (exempt) VAT payment in respect of :-
- New or extension of Capital Investments exceeding Kshs 1,000,000
- Donations for official use of NGO’S & charitable organizations.
- Oil exploration
- Geo-thermal exploration
- Manufacture of goods in custom bonded factories.
- Official aid funded projects.
- Donations to finance projects meant for the needy & destitute persons.
RIGHTS AND OBLIGATIONS OF A TAXPAYER
- A taxpayer is entitled to a wide range of rights e.g. deduction of input tax, confidentiality, minimum interference, fair treatment, information etc. He is however obliged to pay the tax charged, issue tax invoices, keep records, make returns on due dates and fulfill any other requirement made by the Commissioner.
If you Supply to a Withholding VAT Agent, he will deduct VAT you charge him but will give you a certificate of withheld VAT at the time of payment. You will still be required to submit a return by the due date and pay all tax
you have charged during the month including the amount that has been
withheld. However to avoid double payment of VAT, you will be required to
deduct the withheld VAT supported by withholding VAT certificates in your subsequent return. Where there is perpetual credit due to withholding VAT system you may claim the excess through form VAT 4 direct from the Commissioner.
De-registration may take place:-
- If one ceases to trade in taxable goods or services,
- If one closes the business or turnover falls below Kshs 2,000,000 (5,000,000/= wef January 2007) per year.
Please visit the DTD office nearest to you.
DOMESTIC TAXES DEPARTMENT
Times Tower Building 19th Floor
Haile Selassie Avenue
P.O.BOX 30742 – 00100