Value-added tax in Kenya

Kenya is one of the most successful and diversified economies on the African continent. When compared to other African countries, which often depend on natural resources to boost government revenue and their economy in general, Kenya adopts a more simplified step through finance, trade and services to boost her revenue.

The Kenyan economy is arguably the strongest in the East African sub-region and has shown great prospects over the years. Nairobi, the Kenyan capital and largest city is also argued to be Africa’s model city for finance and investment.

This article offers all there is to know about the value-added tax in Kenya. 

Meaning of value-added tax 

Value-added tax (VAT) is the general levy on the value of every stage of the products and services offered in the country until the delivery to the final consumers. The tax acts as a form of consumption tax that the government places on all items produced or consumed within the country.

The basic aim of VAT collection in Kenya, and indeed in all countries of the world is to gain revenue. The tax acts as a form of indirect tax that is adopted by countries across the globe for the advancement of the country’s general income collection strategy and the country’s fiscal growth. 

In Kenya, VAT acts as a significant form of government revenue and assists the Kenyan government in growing its overall fiscal demands to service its budget. 

History and purpose of VAT in Kenya

VAT in Kenya can be traced back to the year 1990 when Kenya had gone through an economic boom in various sectors of its economy. The Kenyan government enacted the Kenyan VAT Act in 1990, the VAT Act 1990 replaced the long-existing Sales Tax Act of Kenya, which was officially the form of taxation by the Kenyan government on the consumption of goods and services in Kenya. Nonetheless, the scope of the Sales Tax Act was limited to finished goods sold to the consumer and not placed on every stage of production as is the case with the VAT.

The general aim of the Kenyan VAT Act 1990 was to enlarge the taxing base of the Kenyan government to include taxes from the point of production up until the goods are received and bought by the consumers. The VAT Act was also to increase government revenue and generally boost the Kenyan economic growth rate because the government of Kenya could extend the consumption tax collection right from when the products are made to when they are finally given to the consumers. Currently, the VAT Act 1990 has been amended on several occasions leading up to the present Kenyan VAT Act of 2013. VAT today offers significant benefits to the Kenyan fiscal policy framework and currently accounts for a significant proportion of its entire budget funding.

VAT rate in Kenya

In Kenya, the VAT rate is calculated through the input tax and output tax, the input tax is VATs payable on purchases while output VAT are VATs payable on sales. The law requires that all businesses must file all inputs and output taxes to the Kenya Revenue Authority regularly and pay every overdue on taxes charged.

The VAT regime in Kenya under the 2013 VAT Act is currently divided into five varying classifications of businesses. These five classifications are highly dependent on the kind of business run and its general impact on the entire country, they are:

1. Goods and services that are classified as local taxable supplies, which pay a VAT rate of 16%; or
2. Starting from September 2018, the local supply and sale of fuel to the general public, which pays a VAT rate of 8%; or
3. Goods and services that are classified as zero-rated supplies, which pay a VAT rate of 0%; or
4. Goods and services that are captured under the VAT Act but are exempted from paying VAT; or
5. Goods and services that are out of the scope of the VAT Act and do not generally pay VAT.

The goods and services that are classified as zero-rated supplies include, but goods and services relating to the agriculture industry, the medical industry, small-income commodities and general exports out of Kenya. On the other hand, the goods and services that are classified as exempt supplies are goods and services in the educational sector, financial services, health care and public transportation. The major aim of these zero-rated and exempt goods and services is to alleviate the entire cost of living on essential goods and services in the Kenyan market while boosting the overall economic growth of Kenya.

How to register for VAT in Kenya

In Kenya, the Kenya Revenue Authority (KRA) is responsible for the administration and enforcement of the VAT Act 2013. the KRA is charged with the responsibility of setting standards, supporting businesses, ensuring compliance with the VAT Act and conducting audits that would help in supporting the equitable taxation of businesses in Kenya. All businesses registered for the VAT in Kenya are expected to maintain accurate records that are essential to the VAT collection strategy of Kenya, businesses are also expected to generate and keep invoices while ensuring they remain on the highest standards of their general VAT obligations according to the VAT Act. 

The Kenyan VAT Act 2013 provides a benchmark for the taxation of goods and services in Kenya, if a Kenyan business’ income surpasses the expected benchmark, such business must register for the VAT with the KRA. The annual benchmark that businesses are expected to meet to qualify for VAT registration in Kenya is Ksh5 million. Nonetheless, Kenyan businesses having income values less than Ksh5 million are allowed to register for VAT in Kenya voluntarily and can claim input tax credits on their VAT. 

Registering for VAT in Kenya can only be done online through the KRA portal which is www.kra.go.ke.

Conclusion

The Value-Added Tax (VAT) is a key part of Kenya’s fiscal policy since it generates considerable revenue for the government. Kenya’s VAT system is designed to foster economic growth while providing relief for essential goods and services.

Businesses must understand and comply with VAT laws to avoid penalties and maintain a competitive edge. The government’s ongoing efforts to resolve issues and improve VAT administration would contribute to the country’s tax system being more efficient and effective.

Kenya’s VAT implementation has been riddled with complications. Tax evasion, fraud, and a complicated regulatory system are all common issues. Despite that fact, in recent years, the Kenyan government has taken steps to address these difficulties and improve VAT administration. This includes implementing computerized tax systems, increasing audit capabilities, and boosting taxpayer education and awareness.