VALUE ADDED

TAX(VAT)
Lesson

Reference Act:
Value Added Tax Amendment
Act of 2013

Introduction
VAT is a tax on spending which is collected by businesses
and passed on to the government.
Sec. 5 of the VAT Act provide that VAT shall be charged on
the supplier of goods or services in Kenya and on the
importation of goods or services into Kenya.
VAT is charge on any supply of goods and services made
or provided in Kenya where the supply is taxable supply
made by a taxable person in the source of furtherance of
a business

Commencement of VAT
VAT was introduced in Kenya in 1990 to replace
sales tax. The decision to replace sales tax with
VAT was a result of the perceived in efficiencies in
the sale tax system.
These include:1.The sales tax system was a single stage system.
Sales tax was only levied only once at
manufacturer level.
In a country where tax
evasion is rampant a single stage tax system
would result in higher revenue loss that would
normally not be incase of system of multi-stage
like VAT.

2. Where inputs for manufacturing were

subject to sales tax, then the imposition of
sales tax on the finished products would
result in the imposition of tax i.e. the care
sending effect.
3. The sales tax system had a limited scope
i.e. sales tax was only levied on certain
specified manufactured goods. Service did
not fall within the scope of sales tax. Sales
tax had a narrow tax base as compared to
VAT with the result that the revenue yield
was comparatively high.

 VAT is an indirect tax. It is essentially a tax on domestic

consumption in the economy.
Under the VAT it is the end users or consumers that
ultimately bear the tax.
VAT is charged on each transaction in the production and
distribution chain.
VAT payable is determined by deduction the VAT charged
on purchases (input tax) from the VAT charged on supplier
(output tax).

VAT payable = Output tax input tax

Illustration
A manufacturer acquired raw material worth
shs.100,000 on which VAT is levied @ 16%. At each
stage of production and distribution chain 25%
conversion cost are incurred and a 30%, mark up is
made.
Determine the total VAT payable to the government

Solution

IMPORTANT TERMS IN VAT

Value Added:
It is the increase in worth of a supply when it changes
hands in the line of manufacture and distribution.
- Output Tax
This is the VAT charged by a registered person when he
makes a supply of taxable supplies in the course of his
business.
- Input Tax
This is the VAT charged on a taxable person when he
acquires taxable supplies for use in the furtherance of
his business.

 Taxable person:
This is a person who is liable to apply for registration
under the VAT Act (check registration for VAT).
- VAT payable/refundable
It is the difference between input and output tax.
If output tax is more than the input tax the difference is
the VAT payable.
If input tax is higher than output tax the difference is
the VAT refundable.
- Tax period
It means one calendar month. VAT is accounted for on a
monthly basis.

Supply
This means transacting in taxable goods or services.
Supply includes the following:
a) The sale, supply or delivery of taxable goods to
another person;
b) The sale or provision of taxable services to another
person.
c) The appropriation by a registered person of taxable
goods or services for his own use outside the business.
d) The making of a gift of any taxable goods or
services;

 e) Letting of taxable goods on hire,

leasing or other transfers;
f) Provision of taxable services by a
contractor to himself in constructing a
building and related civil engineering
works for his own use, sale or renting to
other persons.
g) The receipt of a sum of money by a
registered person for loss of taxable
goods or services.

 Any other disposal of taxable goods or provision

of taxable services.
Taxable goods/ services
- Goods/ services on which VAT is chargeable.
Exempt goods/ services
- Goods/ services on which no VAT is chargeable.
Zero Rated Goods/services
- Goods/ services on which VAT is chargeable at
0%

VAT Rates:
There are two Rates in VAT:
1) 16%: It is the general rate applied on all taxable goods
and services except those in(2) below. (the 14% rate for
restaurant and catering services was harmonized to the
general rate of 16% w.e.f 1/1/2006)
2) 0%: It is the rate applicable to the zero rated goods and
services
3) 12% for electricity consumption above 200,000KWh
with effect from 2008.

OPERATION OF VAT
- Every registered person is required to charge VAT when he
makes a supply of taxable goods and services.
This VAT is referred to as output VAT.
On the other hand, when a registered person is acquiring
goods and services for use in the furtherance of his
business, he pays VAT. This is known as Input Tax.
- At the end of the tax period, the taxable person is required
to deduct the Input Tax from the output Tax and pay any
balance thereof to the Commissioner of Domestic Taxes.
If the input tax exceeds the output tax he carries the
balance forward to offset it against the output tax in the
next period

Example
Mr. X, a registered trader had the following transactions
in the month of March:
Sh.
Sales
100,000
Purchases
70,000
Assuming the above figures are VAT exclusive and the
VAT rate is 16%, show his VAT position for the month of
March.

Solution
Output Tax
16% x 100,000
=
Input Tax 16% x 70,000 =
11,200
VAT payable
4,800

16,000

VAT REGISTRATION
Any person or business making taxable supplies must be registered
for VAT if the taxable turnover exceeds certain limits.
The limit is defined according to the length of the period over
which business is carried on e.g. the minimum turnover for
compulsory VAT registration is as follows:
Shs.13,000,000 p.a
Shs.2,400,000 for 9
Shs.1,800,000 for 6
Shs.1,200,000 for 3

or
months or
months or
months

Taxable turnover means the value of taxable suppliers made. The

turnover can be determined with reference to past or expected
turnover.

 The following are required to register for VAT irrespective of

their taxable turnover;
i. A designated person who deals in designated jewelry prerecorded music, timber, Motor Vehicle, parts and
accessories, and household and domestic, electric and
electronic equipments and appliances.
ii. Any person who provides accounting services including any
type of auditing, book-keeping or similar services.
iii.Any person who provide legal and arbitration services.
iv.Auctioneer, state valuer.
v. Any person who in any one year sells four or more motor
vehicles.

A person may apply for voluntary registration i.e. where

offer for registration is not a must.
However, such registration is done at the discretion of
the commissioner.
The benefits of registration are:
1.One is able to recover the whole or part of the tax paid
on purchase (input tax). This will minimize the cost of
inputs leading to improved profits and competitive
pricing.
2.The registered person can issue tax invoices to his
customer who can then claim the VAT charged.

Types of Registrations
a) Normal Registration:
This occurs when a trader who meets the registration
requirements applies for registration and is duly registered
and issued with a registration certificate.
b) Voluntary Registration:
Occurs when a trader who is not qualified for registration
applies for registration so as to enjoy the benefits of a
registered person. It is subject to the approval of the
Commissioner.
c) Intending Trader Registration:
It occurs when a trader who expects to deal in taxable
goods and services applies for registration before he
commences trading.

 d) Compulsory Registration:
It occurs when a trader who qualifies to register fails to
do so. In such a case, the trader once he is identified is
issued with a registration certificate without his
application.
Tax can also be demanded from him on any sale made
in the past.
e) Temporary Registration:
This occurs when a trader who has not been registered
applies to be registered so as to undertake certain
business transactions. He is issue with a temporary
registration number.

 Note
1. Any registered trader is required to display his
registration certificate in a visible position in his
business premises.
2. Any trader who is eligible for registration and
fails to apply for registration is liable to a default
penalty of Sh. 100,000.
3. In order to register the following documents
are required:
- Personal Identification Number (PIN) of the sole
proprietor, partner or director
- A copy of the certificate of registration of
business name:

De-registration
It is the process of removing a registered trader
from the VAT register. Any trader wishing to be deregistered for any reason may apply to the
commissioner of Domestic Taxes.
A person may apply for de-registration of the
taxable turnover in the period preceding of 12
months doesnt exceed Shs 2,000,000 and is not
expected to increase the next period of 12 months.
A person seeking de-registration must notify the
commissioner of the value of stock and material in
hand.
Such a person will be required to pay tax on such
material before de-registration can be effected.

 De-registration may be requested on the

following grounds
i) Closure of business
ii) Sale/transfer of business
iii) Death of a trader
iv) Legal incapacitation (Bankruptcy)
v) Insolvency
vi) Change of business status eg. Partnership to
limited company
vii) If the turnover falls below the prescribed
limit.

CLASSIFICATION OF VAT
Zero rated supply
Zero rated supply means that: No VAT is charged on the
supply (0%) but the supply is treated as a taxable supply
in all other respect.
Accordingly the rate at which VAT is charged on the supply
is zero.

However, the value of supply shall be taken into the

computation to determine whether the supplier is a
taxable person who is required to be registered.
A registered person making zero rated supply will not
charge VAT on their supplies but can obtain a refund on
the VAT paid by them on their goods or services.

Exempt Supplies
When a person makes exempt supplies, he will
not be regarded as carrying out a taxable supply.
VAT is not chargeable in respect of exempt
supplies; he cannot obtain any refund of the VAT
suffered on the supplies made to him.
He absorbs any VAT suffered on goods or services
supplied to him.

 Taxable supplier (Standard rated supplies)

VAT is charged on taxable supplies.
The input tax in respect of taxable supplies may be deducted in
appropriate cases.
Deductable input tax
The input tax which may be deducted by a registered person shall
be: The whole of the tax where all his supplies are taxable or
Such part of the tax that can be attributed to the taxable supplies
where only a proportion of the suppliers are taxable.
Where a person makes both exempt and taxable supplies he may
only claim the input tax attributed to the taxable supplies.
However, one can claim all the input tax of the input tax related to
exempt supplies.
Its always less than 5% of the total input tax.

 In the case where one makes both taxable

and exempt supplies, deductable input tax is
given by:Value of taxable supplies
(Including Zero Rated Supplies) X
Input tax

Value of total supplies

CLASS WORK
Write note on:
1.Rights and privileges
registered Person
2.

Objections and appeals:

a) Process of Appealing
b) Hearing of the appeal
c) Powers of the Tribunal

of

vat

ACCOUNTING FOR VAT, TAXABLE

VALUE, TIME OF SUPPLY

Taxable value
It is the value of a supply on which VAT is
due. It is the consideration given in
exchange for a supply and it may be
payment in money or in any other form.
The taxable value is important because it
is on this value that we calculate VAT.

 Rules for
Value.

determining

the

Taxable

a) If a discount is offered on a supply the taxable value is

the value of such a supply, less the discount offered.
b) If the consideration is not in money (Barter
Transaction) the taxable value will be the consideration
which would have been paid if money was the only
consideration (open market value).
c) For imported services the taxable value shall be the
price at which the services are provided.
d) For imported goods the taxable value shall be the cost
of such goods plus any duty or customs payable on such
goods.

 Note
- Cost of Imported goods = Invoice price (cost) +
Insurance + Freight
- Cost of Imported goods is also known as the CIF
value.

e) To determine the taxable value, any amount

charged on: packaging, advertising, financing,
servicing, warrants, commission and any other
liability that the purchaser has to pay in addition
to the price, is added to the price of the
commodity.

Tax Point
- This is the point in time at which the tax (VAT)
becomes due and payable. For VAT to become due and
payable a supply must have taken place.
- VAT is accounted for on monthly basis. VAT should be
accounted for in the month in which the tax point
occurred using the VAT rate that was in force at that
time.

 Point is determined as follows:

a) When the goods are supplied or the services
provided to the purchaser or;
b) An Invoice is issued to the purchaser in respect
of the supply, or;
c) Payment is received for all or part of the supply,
or
d) When a certificate is issued, by an architect,
surveyor or any person acting as a consultant or in
a supervisory capacity, in respect of the service,
Whichever of the four occurs earliest.

 For VAT purposes, the tax becomes due and

payable at the tax point.
However, the registered traders have been
given an allowance of up to 20th of the following
month to make
the payment to the
Commissioner of Domestic Taxes.
For example the VAT charged in the month of
January 2006 is payable by 20th February 2006.
Note
VAT is payable whether payment has been
received or not as long as the tax point has
occurred.

Charge to tax, deductions of

input tax,
apportionment method of
input
tax
INPUT TAX DEDUCTION
Traders registered for VAT are entitled to claim
all the VAT they incur on purchase of supplies for
use in the furtherance of their businesses.
This VAT (Input Tax) is claimed by deducting it
from the Output tax.

 However for Input Tax to be deducted it must fulfill

the following conditions:
1. It must relate to taxable supplies for use in the
furtherance of business.
2. The trader must be registered for VAT.
3. It must be claimed within 12 months from the month it is
incurred
4. The Input Tax must be evidenced by a tax invoice. For
imports, Input Tax is evidenced by documents from the
customs department.
5. Input Tax claimed must be shown in the monthly VAT
payment document (VAT return).

Input tax apportionment

A registered trader may be dealing in supplies taxed
at the general rate, zero rated supplies and exempt
supplies. Such a trader will also incur Input Tax on
purchase of supplies that are related to all the items
that he deals in.
For example, an expense like electricity will be used
in the business for making all the business supplies.
In such a case, it is important to note that only the
Input Tax that relates to the taxable supplies can be
claimed.
Taxable supplies refer to supplies taxable at 16%,
12% and 0%.

 The deductible Input Tax is determined using the

following formula.
Deductible Input Tax = Value of Taxable Supplies x
Input Tax
Value of Total Sales

Note:
The Input Tax to be apportioned is the
Input Tax that relate to both the taxable
supplies and the exempt supplies.

Example
Mr. X a registered trader, incurred input tax of
Sh.500 on purchase of his stock. Out of this stock,
he sold as follows: Goods taxable at 16% worth
Sh. 2,000, zero rate goods worth Sh.2,000, and
exempt goods worth Sh.2,000. He will claim the
following Input Tax.
Solution
Deductible Input Tax = Taxable supplies x
Input Tax
Total supplies
2,000 + 2,000 x 500 = Sh 333
2,000 + 2,000 + 2,000

VAT RECORDS

The Value Added Tax (VAT)

account
The VAT account is posted with month
totals. Total input tax for the month is
debited to the account and the total
output tax credited.
A credit balance would represent the tax
payable to the commissioner while a
debit balance will represent excess input
tax which is carried forward and offset
against output tax of the following month.

Value Added Tax (VAT) returns

Registered persons are required to
submit a VAT return (form VAT 3) by
20th day or not later than the last
working day of the month following
the month covered by the return if
the 20th day is a weekend or a
public holiday.

 The return should show separately for each rate

of tax:
a) Particulars of the total value of supplies.
b) The rate of tax to which the supplies are
liable.
c) The amount of tax payable.
d) The total value of taxable supplies received.
e) The rate at which tax was paid.
f) The amount of tax paid in respect of which
deductible input tax is claimed.
If no transactions are carried in any month a NIL
return is submitted. The taxpayer should keep a
copy of returns made for record purposes.

Payment of VAT
All registered traders are required to pay any
VAT payable by the 20th of the month following
the month to which the tax relates.
It is important to note that whether there is any
VAT payable or not, a VAT return must be
submitted Payment of VAT can be made at any
VAT regional office or to the Central Bank of
Kenya.

Refund
It is the repaying (paying back) by the commissioner of
tax that the taxpayer had paid to the Commissioner.
Refund of tax may occur in the following
situations:
1. Where goods have been manufactured in Kenya or
imported into Kenya and tax paid thereon, but before
being used in Kenya, such goods are exported.
2. Tax paid in Error:
It is important to note that if the commissioner refunds
any tax in error or grants a remission in error, then the
taxpayer is required to pay such tax on demand by the
commissioner.
If a taxpayer pays any tax in error (e.g. due to
miscalculation) he is entitled to a refund.

 3. Refund of tax on Bad debts:

Where a registered person has supplied goods or
services and has accounted for the tax on that
supply but has not received any payment from
the buyer, he may after a period of 3 years from
the date of such supply or where the buyer has
become legally insolvent, apply to the
commissioner for a refund of tax or remission of
the tax.
4 . A refund is also given if in the opinion of the
Minister for Finance, it is in the public interest to
do so e.g.. in times of drought, floods or other
calamities.

Relief due to doubt or

uncertainty in recovery of tax
If the commissioner is of the opinion
that:
a) There is uncertainty as to any
questions of law or fact or,
b) There is uncertainty or undue difficulty
or it proves expensive to recover tax,
then he may abstain from recovering
such tax and hence such tax is written
off.

Issue of samples
Where taxable goods:
a) Are distributed free as samples by a registered
person for the furtherance of his business and
b) Such goods have a value of less than Sh 200 per
sample and
c) They are freely available and
d) Are not limited in distribution to fewer than 30
persons in any calendar month.
Then such goods are not liable to VAT.

Security for unpaid tax

The commissioner can apply to the
Registrar of Lands, to put any Land and
buildings belonging to a defaulting
taxpayer as security for tax.
Such property can not be sold until all
tax is paid.
The commissioner may also require that a
taxpayer provides security in any form for
any tax unpaid.

Class work 2
Write notes on the following
COLLECTION AND RECOVERY OF TAX
REFUND OF TAXES AND WAIVERS
The refund circumstances:
Documents accompanying claim for refund under
Sec. 24 (bad debts)
VAT refund audit procedure

Offences, Fines, Penalties and

Interest
(a) Any person who makes false statements, false
documents, false returns, a nonregistered person,
fraudulent evasion of tax:.
- Fine not exceeding Sh.400,000 or double the tax
evaded, whichever is the greater and/or imprisonment
for a term not exceeding three years.
- Forfeiture of any goods which have passed with the
commission of the offence.
(b) Failure to submit a return
- Penalty of Shs.10,000 or 5% of VAT due whichever is
higher (Sh. 10,000 if a refund is due).

 (c) Failure to keep proper records

- penalty of between Shs.10,000 and Shs.200,000
(d) Failure to supply a tax invoice
- Penalty of between Sh 10,000 and Sh 200,000. Any
goods connected with the offence are liable to
forfeiture.
(e) Later registration
- Penalty of up to Sh.20,000
(f) Failure to display registration certificate
- Penalty of up to Sh.20,000 and a fine of up to
Shs.200,000 and/or imprisonment for up to two years.
(g) Late payment of tax 2% per month interest
penalty compounded.

General Penalty
For offences under the VAT Act
for which no other penalty is
provided; a maximum of Sh.
500,000
and/or
three-year
imprisonment.

Sum up..
Students are advised to read in full the
VAT Act

End

Thank you