| 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
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.
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.
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.
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)
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
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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