As a business owner or professional in Kenya, staying on top of Value-Added Tax (VAT) rules is crucial for compliance and financial efficiency. VAT is a consumption tax applied at each stage of the supply chain, and recent updates have introduced important changes. In this post, FNJ will break down the basics, key obligations, and the latest amendments.
What is VAT?
VAT is essentially a tax on the value added to goods and services. It’s calculated using an input-output mechanism, where businesses deduct the VAT they’ve paid on inputs from the VAT they charge on outputs. This ensures the tax is only on the added value at each step.
In Kenya, VAT applies to both locally supplied and imported goods and services. The system aims to be fair by allowing deductions for business-related inputs, but strict rules govern eligibility.
VAT Rates and Registration Requirements
Kenya operates with two main VAT rates:
- 0% for zero-rated supplies (like certain exports or essentials).
- 16% for all other taxable supplies.
Registration is mandatory if your taxable supplies exceed or are expected to exceed KES 5 million in a 12-month period. Note that sales of capital assets do not count toward this threshold. If you’re below the limit, you can still register voluntarily if you meet the requirements.
However, non-residents supplying services to Kenyans via electronic networks, the internet, or digital marketplaces must register regardless of the threshold.
Claiming Input Tax Deductions
Registered businesses can deduct input tax on purchases or imports, but only if those inputs are used to make taxable supplies. Key conditions include:
- Deductions must be claimed within six months after the tax period in which the supply or import occurred.
- You need proper documentation, such as invoices, to support the claim.
- From 1 July 2023, an extra rule applies: The supplier must have declared the sales invoice in their VAT return for you to recover the input tax.
Defining Taxable Value
The taxable value is simply the consideration for the supply. It includes any taxes (except VAT), duties, levies, fees, and charges related to the supply.
Key Changes from Recent Legislation
Kenya’s tax landscape evolves quickly, with two major acts bringing updates:
Tax Laws (Amendment) Act, 2024 (Effective 27 December 2024)
This act introduced several practical changes to the VAT Act:
- Time of Supply for Exported Goods: Now tied to when the certificate of export or relevant documents are available, making it easier to align with real-world logistics.
- Input Tax Apportionment: Removed the 90:10 rule, which previously allowed full deductions if exempt supplies were under 10% (or no deductions if over 90%). Businesses must now apportion more precisely.
- Exemption for Business Transfers: Transferring a business as a going concern is now exempt from VAT, reducing costs for restructurings.
Finance Act, 2025
This act, effective in 2025, focuses on streamlining processes and closing loopholes. Highlights include:
| Change | Description |
|---|---|
| Refund Application Periods | Reduced from 24 months to 12 months for excess and withholding VAT refunds. |
| Bad Debt Refunds | Timeline cut from 3 years to 2 years for VAT on bad debts. |
| Offset of Refunds | Approved refunds can now be offset against other VAT liabilities. |
| Mandatory Tax Invoices | All registered persons must issue tax invoices at the time of supply, even for non-taxable supplies. |
| Penalties for Misuse | Taxpayers must pay VAT if exemptions or zero-rating are used inconsistently with their intended purpose. |
| Health Sector Exemptions | Items like clinical trial kits, mosquito repellents, and services to their manufacturers (upon CS Health recommendation) are now exempt. |
| Tea for Local Consumption | Now exempt from VAT (previously taxed at 16%). |
| Zero-Rating for Packaging | Packaging materials for tea and coffee are zero-rated, subject to approval by the Cabinet Secretary for Agriculture. |
VAT Obligations for Non-Resident Suppliers
If you’re a non-resident providing services to Kenyans through digital channels, you’re subject to VAT under The VAT (Electronic, Internet and Digital Marketplace Supply) Regulations, 2023. These rules clarify that such supplies are taxed at 16%.
A “digital marketplace” is an online platform connecting sellers and buyers. Non-residents must register for VAT if supplying to Kenyan recipients in:
- Business-to-Consumer (B2C) transactions (since April 2021).
- Business-to-Business (B2B) transactions (since 1 July 2022).
Before July 2022, Kenyan recipients handled B2B VAT via reverse charge. Now, non-residents use a simplified registration framework, file monthly VAT returns, and pay any due VAT by the 20th of the following month.
Covered services include downloadable content, e-books, subscription media, software, cloud storage, online education, and more. For the full list, reach out to us at FNJ & Associates.
Due Date
Both VAT payments and returns are due by the 20th day of the following month. Returns are submitted online via KRA’s iTax Portal
Stay Compliant with FNJ & Associates
VAT compliance doesn’t have to be overwhelming. With these updates in mind, review your operations to ensure you’re registered correctly, claiming deductions properly, and adapting to new timelines. If you need personalized advice or help with registration, refunds, or digital VAT obligations, contact FNJ & Associates today. We’re here to make tax straightforward for your business.