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 VAT. As a registered person you are also legally bound to submit 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.
You should subtract the input tax attributable to taxable supplies from your output tax and pay the difference to the Commissioner of VAT. If your input tax is greater than your output tax you should carry forward the difference as a credit to your next VAT return.

In certain circumstances you may be refunded the excess of your input tax over output tax if the Commissioner is satisfied that such an excess arises from: -

(a) Making zero rated supplies, or

(b) Physical capital investments where input tax deducted is Kshs. 1,000,000/= or more (provided the investments are used in making taxable 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 (including zero-rated supplies) X Input Tax to be apportioned
Total value of taxable supplies

Tax Rates

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 all taxable goods and taxable services.

14%: This is applicable to only hotels and restaurants services. It is applicable to: -

· Restaurant services (including bar & beverage services) offered by a restaurant owner or operator.

· Accommodation and all other service provided by hotel owner or operator including telecommunications, entertainment, laundry, dry cleaning, storage, safety deposits, conference and business services.

NB: Designated goods such as cigarettes, matches, gift items, confectionaries and other articles sold over the counter or in mini shops within the hotels and restaurants are taxable at the general rate of 16%

0%: This applies to certain categories of goods and services, which includes exports, agricultural inputs, pharmaceutical products and supplies to privileged persons. The purpose of zero rating is to make the supplies cheaper as the dealers in these goods can 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 but taxable at the rate of zero per cent. Zero-rated supplies are deemed to be taxable supplies.

If you supply zero-rated goods, 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.

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. Examples of zero-rated supplies include all exports, agricultural inputs, pharmaceuticals, and educational materials, among others.

The VAT Law provides for zero-rating of exported goods irrespective of the tax status of the goods. The zero rating concept is a common phenomenon among countries where the VAT system is in operation.

Any taxable goods or services exported by a registered person shall be zero-rated if there is evidence of exportation consisting of: -

(i) A copy of sales invoice
(ii) Copies of bill of lading, road manifest or airway bills
(iii) Certified Export Entries (C63 's)
(iv) Certificate of exportation signed by the Commissioner of Customs

and Excise in the case of sugar and other excisable goods.

As mentioned earlier, there are traders 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 to the VAT Act.

(c) Exempt Services: - are listed in the 3rd schedule to the VAT Act. All other services not in the list are deemed to be taxable. The current list of exempt services include the following:

1. Financial services excluding the following:

(a) Financial and management advisory services;

(b) Safe custody services

(c) Executors and trusteeship services.

2. Insurance and reinsurance services.

3. Education and training services offered to students by institutions and establishments registered by the Government. Business or user training and other consultancy services designed to improve work practices and efficiency of an organisation are taxable.

4. Medical, veterinary, dental and nursing services.

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

6. Agricultural, animal husbandry and horticultural services. This refers to services rendered in farms including harvesting, bailing, threshing, husking, shelling, animal shearing, pest destroying & spraying, seeding, pruning, picking of fruits, packing, hire of agricultural equipment etc. Subsidiary services such as transportation and storage are taxable.

7. Social welfare services provided by charitable organisations registered as such, or which are exempted from registration, by the Registrar of Societies under section 10 of the Societies Act, or by the Non-Governmental Organisations Co-ordination Board under section 10 of the Non Governmental Organisations Co-ordination Act, 1990 and whose income is exempt from tax under paragraph 10 of the First Schedule to the Income Tax Act and approved by the Commissioner of Social Services.

8. Burial and cremation services, including services provided in the making of arrangements for or in connection with the disposal of the remains of the dead.

 

Note: Any services rendered after burial will be subject to VAT.

 

9. Transportation of passengers by any means of conveyance except where the means of conveyance is hired chartered or leased.

 

10. Renting, leasing, hiring or letting of land, residential and non-residential buildings. Provided that this does not apply where such services are supplied in respect of-

- Car park services; or

- Conference or exhibition services, except where such services are provided for educational institutions as part of learning.

11. Postal services provided through supply of postage stamps including rental of post boxes and mailbags and any subsidiary services thereto.

12. Community, social and welfare services provided by Local Authorities.

13. Insurance agency, insurance brokerage, stock exchange brokerage and tea and coffee brokerage services.

14. Hiring, leasing, or chartering of goods listed in Part I of the Second Schedule and Part B of the Fifth Schedule but excluding chartering of aircraft and hiring of buses.

Note:

(i) Chartering of aircraft and hiring of buses became taxable with effect from 1st September 2001.

(ii) Chartering of aircraft for use outside Kenya is a service exported out of Kenya and is therefore zero-rated.

(iii) Chartering of aircraft for provision of Air Ambulance Services is also exempt but the exemption is restricted to charter by Organisations registered for the provision of such services.

15. Tour operation and travel agency services including travel, hotel, holiday and other supplies made to travellers but excluding in-house supplies and services provided for commission earned on air ticketing.

For purposes of this paragraph in-house supplies means supplies which are either –

(i) Made from own resources; or

(ii) Bought from third parties but materially altered so that the supply made is substantially different to that purchased.

16. Services rendered by

a) Trade, professional and labour association

b) Educational, political religious, welfare and other philanthropic associations to their members provided that this do not apply where such services are rendered by way of business.

17. The following entertainment services –

(a) stage plays and performances which are conducted by educational institutions, approved by the Minister for the time being responsible for education as part of learning;

(b) sports, games, or cultural performances conducted under the auspices of the Ministry of Culture and Social Services;

(c) entertainment of a charitable, educational, medical, scientific or cultural nature as may be approved in writing by the Commissioner prior to the date of entertainment for the benefit of the public; or

(d) entertainment organised by a non-profit making charitable, educational, medical, scientific or cultural society registered under the Societies Act where entertainment is in furtherance of the objects of the society as may be approved in writing by the Commissioner prior to the date of the entertainment.

18. Accommodation and restaurant services provided within the following premises.

(a) Establishments operated by charitable or religious organisations registered under the Societies Act for charitable or religious purposes.

(b) Establishments operated by an educational training institutions approved by the Minister for the use of the staff and students by that institution; or

(c) Establishments operated by a medical institution approved by the Minister for the time being responsible for health for the use by the staff and patients of such institutions; or

(e) Canteens and cafeterias operated by an employer for the benefit of his low-income employees, which the Commissioner may approve subject to such conditions as he may prescribe.

 

19. Conference services conducted for educational institutions as part of learning where the Ministry approves such institutions for the time being responsible for Education.

20. Car park services provided by local authorities and by an employer to his employees on the premises of the employer.

21. Transportation of tourists by any means of conveyance.

Imported Services

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 form – VAT 7. 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 due on imported taxable services is paid using a form VAT 28. However this tax may be reclaimed as input tax in your subsequent VAT 3 returns.

Designated Goods

These are goods, which are taxable at all levels of distribution. All taxable goods are now designated and therefore taxable at all levels of sale including factory, wholesale and retail with effect from 1st October 2002. This follows the designation of tea, coffee, vegetable and animal oils and fats, margarine, sausages, biscuits, prepared and preserved fish, jams, marmalades, yeast, tomato ketchup and tomato sauces which were the only goods taxable at the factory level. Taxpayers who supply goods that are subject to 16% will charge the same rate at the wholesale and retail level while those who supply Zero rated goods will be entitled to claim input tax since the rate on such goods will remain taxable at 0%(Zero-rated)

Refunds

The VAT Act provides for taxpayers to claim refunds for different reasons.

1. Inventory claim: - The Act allows you to deduct tax paid on stocks, assets and buildings or civil works upon registration provided that such buildings or civil works are constructed or such goods or assets are purchased within twelve (12) months prior to registration or within twenty four (24) months as the Commissioner may allow. However declaration of such tax must be made within 30 days from the date of registration in a form-VAT 5 for the Commissioner's approval. Any input tax incurred prior to registration should not be deducted in the VAT 3 return until the letter of approval from the Commissioner is received.

2. When you make zero-rated supplies you incur input tax but you have no output tax to off set the same from. The law however allows you to claim refund of the excess input tax from the Commissioner.

3. When you spend on capital investments in furtherance of your taxable business you accumulate input tax in excess of output tax. The Law allows you to claim from the Commissioner for payment of the amount where input tax deducted exceeds one million shillings (Kshs 1,000,000/=) provided that the investments are used in making taxable supplies.

4. 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.

5. 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. There are also cases where you are entitled to remission (or Zero rating) but cannot produce documentary proof of the same at the time of purchase or importation, and are charged tax but you obtain the documents later. Tax paid in such circumstances is refundable if claimed by the person who paid it.

6. 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.

7. 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 claim is made through a form-VAT 4

Remission

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) imported or purchased for investment;

(b) such other goods, including motor vehicles and computers , donated or purchased for donation by any person to non-profit making organization or institutions approved by the Government, for their official use or for free distribution to the poor and needy persons , or for use in medical treatment, educational, religious or rehabilitation work or other Government approved projects;

(c) Any company granted oil exploration or oil prospecting license in accordance with provisions of the Petroleum Exploration and Production Act;

(d) Manufacturers of goods in licensed customs bonded factories for export only

(e) official aid funded projects;

(f) Taxable services rendered to public road rehabilitation projects financed through donations by the private sector subject to such conditions as may be set out in regulations made under the VAT Act

(g) Goods for supply as ship-stores to national airlines, shed netting for agricultural or horticultural use of reinforced PVC or polythene.

(h) Taxable services supplied to projects approved by the Government and funded through donations by any person for the benefit of the poor and destitute persons

(i) goods imported or purchased by any company which has been granted a geothermal resources licence;

(j) Goods imported under bond for manufacture of exports, indirect

 

Exports, goods free of import duty, and goods for use imported official aid- funded projects.

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.

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 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.

 
 
 
 
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