Indirect tax - Kenya

Value Added Tax (VAT) is the main type of indirect taxation in Kenya. Value added tax (VAT) shall apply to:

• the taxable supplies of goods and services provided by a registered person in Kenya
• the importation of taxable good
• a supply of imported taxable services.

A VAT taxable event is to be considered at the time and place of supply for goods or service.

VAT in Kenya is taxed at a standard rate of 16%. The Act provides for zero rating of:

• exportation of taxable goods
• supply of taxable good under services to an export processing zone (EPZ)
• ship stores supplied to international sea or air carrier on international voyage
• supply of coffee and tea for export to auction centers
• transportation of passengers by air carriers on international flight
• transfer of natural water by National or County Government
• supply of taxable goods and services to public bodies, privileged persons and institutions.

The VAT Act also exempts a number of goods from VAT (list of items is provided in The Act).

Exempt Services include:

• financial services (operation of accounts, issuing card, ATM ..)
• insurance and reinsurance services excluding actuarial services, services of assessors and loss adjusters and management of insurance consultancy services
• educational services
• medical, veterinary, dental and nursing services
• agriculture, animal husbandry and horticultural services;
• burial and cremation services
• transportation of passengers excluding international air transport and hired or chattered services
• sale, lease, hire or letting of land or residential
• exportation of vatable services

Place of supply

A supply of service is made in Kenya if the place of business of the supplier is in Kenya.

A supply is also considered to be made in Kenya if the recipient of the supply is not a registered person but the services are physically performed in Kenya or the supply relates to immovable property in Kenya or when the supply is the transfer of: right to use, a copyright, patent or trademark.

Time of supply

The time of supply for the purpose of VAT is the earlier of the date on which the supply is made, the date upon which a certificate is issued by a consultant, the date an invoice is issued or when payment for the supply either in part or whole is received.

Treatment of imported services (Reverse Charge VAT)

This is no longer applicable when a registered person receives services from a non-resident supplier.

A non registered person should account for VAT on these imported services.

Yes, the VAT regime in Kenya provides that any person making or expecting to make annual taxable supplies of KShs 5,000,000 or more is required to register for VAT.

Penalties and interest on VAT may be incurred in the event that a person making the minimum taxable sales fails to register for VAT.

Yes, a non-resident person making taxable sales in Kenya amounting to the set minimum is expected to appoint, in writing, an agent who will register and account for VAT on their behalf.

When a non-established person making the minimum taxable supplies fails to appoint a tax representative within the first month after making the supplies, then the commissioner will appoint a tax representative on their behalf.

All taxpayers are required to file a VAT return electronically every month. The due date for VAT return filing is 20th of the following month.

Yes, a fixed penalty of KShs 10,000 is applicable on each instance of late filing of the VAT return.

Late payment of VAT attracts 1% interest compounded monthly.

Yes, upon submitting a VAT return, a person is required to include details of all the supplies made, standard VAT rate supplies, exempt supplies and zero rated supplies during that VAT period.

The person also includes details of the standard rate, exempt and zero rated purchases made during the same period.

Yes, a fine not exceeding KShs 1,000,000 or imprisonment for a term not exceeding 3 years or both is applicable when one is convicted of the offences below:

• falsification of VAT documents
• failure to do the requirements under the Act
• interfering with other persons or processes so as to contravene the VAT Act
• breach of one’s duties as specified in the VAT Act
• failure to prevent or report offences committed under the VAT Act to the relevant auyhorities.

No. An overseas business can only claim VAT in Kenya if they have a tax representative who registered and accounts for VAT on their behalf.

Refund of taxes

The legislation has given more emphasis on refund of VAT. A registered person will only be entitled to a refund arising from zero rated supplies for persons making both taxable at the general rate and zero rate.

Refund of taxes paid erroneously to the KRA will be applied in accordance with the Tax Procedures Act where the commissioner shall apply the overpayment of any other taxes under the tax law in payment of a tax owing to any other tax law. Any remainder shall then be refunded to the tax payer.

On the matter of refund of output tax paid on bad debts, the legislation has given emphasis that, such refunds shall be allowed, however if the the supplier had issued a credit note to the recipient of the supply, such refunds shall not be allowed.

The legislation also states that, any persons who had been refunded output tax paid on bad debts and recovers the amounts hall issue a debit note to the recipient of the taxable supply with a debit note specifying the amount of tax refunded to the Commissioner.

We list below what the tax invoice furnished by the supplier to a purchaser must contain:

• the words ‘TAX INVOICE’ in a prominent place
• the name, address, and PIN of the supplier
• the name, address, and PIN, if any, of the recipient
• the individualized serial number of the tax invoice
• the date on which the tax invoice is issued and the date on which the supply was made, if different from the date of issue of the tax invoice
• the description of the goods supplied including quantity or volume or services provided
• the description of the goods supplied including quantity or volume or services provided
• the details of any discount allowed at the time of supply ix the consideration for the supply and the amount of tax charged.

For the suppliers who provide electronically generated receipts, this must contain:

• the name, address, and PIN of the supplier
• the serial number of the receipt
• the date and time of issue of the receipt
• a brief description of the goods supplied (including quantity or volume)
• the tax payable
• the total amount payable for the supply inclusive of tax.

We list below what a tax invoice for supplies of imported services must contain:

• the name, address, and PIN of the recipient
• the name and address of the supplier
• the individualised serial number of the tax invoice and the date on which the tax invoice is prepared
• a description of the services supplied and the date of the supply
• the extent to which the supply has been applied other than to make taxable supplies
• the consideration for the supply and the amount of tax charged.

The VAT Act provides for issuance of credit notes and debit notes to reduce value of credit notes and increase value of supply. We discuss below details that should be contained in a credit note raised to a purchaser:

A credit note shall contain:

• the words ‘CREDIT NOTE’ in a prominent place
• the name, address, and PIN of the supplier
• the name, address, and PIN of the recipient
• the individualised serial number of the credit note and the date on which the credit note is issued of tax that relates to the difference
• a brief description of the circumstances giving rise to the issuing of the credit note, including the invoice details to which the credit note relates
• the consideration shown on the tax invoice for the supply vii the correct amount of the consideration, the difference between those two amounts, and the amount.

A debit note shall contain:

• the words ‘DEBIT NOTE’ in a prominent place
• the name, address, and PIN of the supplier
• the name, address, and PIN of the recipient
• the individualised serial number of the debit note and the date on which the debit note is issued
• a brief description of the circumstances giving rise to the issuing of the debit note, including the invoice details to which the debit note relates
• the consideration shown on the tax invoice for the supply vii the correct amount of the consideration, the difference between those two amounts, and the amount of tax that relates to the difference.

Exportation of goods or services

The KRA has in the past raised assessments on taxpayers for failure of charging VAT for services taxpayers feel were exports however, this services according to the KRA were consumed in Kenya and therefore subject to VAT.

The VAT Act 2013 defines export of services to mean services provided for use or consumption outside Kenya. There has been a lot of contention on what amounts to an export of service. The Courts, on three different occasions, have addressed this issue with the consensus being that the location where the service is consumed is paramount. It does not matter if the person who requisitioned or pays for the service is outside Kenya. If the consumer of the service is in Kenya then that service shall not be deemed to be an export of service.

VAT on digital Supplies

Effective 1^st April 2021, Supplies made over the internet or an electronic network through a digital marketplace are subject to VAT at the rate of 16%.

Export of Service

The Finance Act 2021 amended the VAT Act to the effect that an export of service shall be exempt from VAT purposes.

Electronic Tax Invoice

The government rolled out a new Tax Invoice Management System, which shall require taxpayers to obtain Electronic Tax Receipt (ETR) Devices capable of:

• Interconnectivity with Information technology networks 
• Ability to store records
• Be secure & tamper proof
• Transmission of tax invoice data at closure of business
• Quick Response code (QR code).

Further, the ETR must have the ability to:

• integrate with the Authority's systems;
• transmit or connect to device that will transmit recorded data to the systems and
• capture the information required under these regulations.

The deadline for compliance is on 1 August 2022.

Import of a taxable service over the digital market place

Currently if a supply of imported taxable services is made to any person, the person shall be deemed to have made a taxable supply to himself. The Finance Bill 2022 proposes to amend this provision by excluding taxable supplies made over the internet or an electronic network or through a digital marketplace.

Registration requirements for suppliers of a digital service

The Bill proposes to exempt persons supplying imported digital services over the internet or an electronic network or through a digital market place from registration of VAT.