Kenya

Scope of VAT and applicable rates

Supplies are either taxable or exempt. The major difference between taxable supplies and exempt supplies is that where the supplies are taxable, the person is required to register for VAT and is obliged to charge VAT, but is also entitled to recover VAT incurred in making such supplies as input tax whereas VAT incurred on making exempt supplies is not recoverable as input tax. 

VAT in Kenya is chargeable on: 

• taxable supplies of goods or services made by a registered person in Kenya; and 

• the importation of taxable goods and services. 

There are three VAT rates applicable in Kenya: 

1. zero rate (0%) 

2. special rate of 8% applicable to the supply of petroleum products (effective 2 September 2018) 

3. standard rate of 16%.

Some of the supplies that fall outside the scope of the VAT system inter alia include: 

• supply of goods in customs bonded warehouses in Kenya

• employment services rendered by an employee to an employer in consideration for a wage or salary

• disbursements to a third party of incidental costs incurred in the course of making a supply. 

A person who makes taxable supplies, or expects to make taxable supplies, totalling KES 5m or more in any period of 12 months is required to register for VAT. The value of supply of capital assets or supplies made solely as a consequence of selling the whole or part of the business or permanently ceasing to carry on the business are excluded when determining whether the registration threshold has been attained. 

A ‘person’ is defined in the VAT Act to mean an individual, company, partnership, association of persons, trust, estate, the government, a foreign government or a political subdivision of the government or foreign government.

VAT registration

Compulsory VAT registration 

The following persons are liable for mandatory VAT registration: 

• a person who has made taxable supplies or expects to make taxable supplies, whose value is KES 5m or more in any period of 12 months, or 

• a person who is about to commence making taxable supplies the value of which is reasonably expected to exceed KES 5m in any period of 12 months. 

Failure to register for VAT by a person who is legally required to register will lead to retrospective compulsory registration by the Commissioner of the Kenya Revenue Authority from the date the person became liable for registration. Furthermore, the person may be liable, on conviction, to a fine not exceeding KES 200,000 or imprisonment for a term not exceeding two years, or both.

Voluntary registration 

The VAT legislation provides for voluntary VAT registration where a person makes or intends to make taxable supplies. The voluntary registration is at the discretion of the Commissioner for the Kenya Revenue Authority. The legislation provides that the Commissioner shall register a person if they are satisfied that: 

• the person is making or will make taxable supplies

• the person has a fixed place from which their business is being conducted 

• if the person has commenced carrying on a business, the person has kept records of his business and has complied with obligations under the revenue laws 

• there are reasonable grounds that the person will keep proper records and file regular and reliable tax returns.

Group registration 

VAT compliance by non-residents 

In instances where a non-resident person with no fixed place of business in Kenya is required to register for VAT, the non-resident person is required to appoint a tax representative in Kenya to meet VAT obligations including submitting of returns and payment of tax in Kenya. 

The tax legislation provides that a tax representative will be registered in the name of the non-resident supplier and the Commissioner will issue a personal identification number (PIN) to the tax representative. It is worth noting that, since May 2021, non-resident entities are able to register for VAT through tax representatives. 

With the above said, the VAT legislation provides for specific rules relating to the taxation of digital supplies.The VAT (Electronic, Internet and Digital Marketplace - A digital marketplace is defined in the VAT Act as an online platform which enables users to sell goods or provide services to other users.) Regulations 2023, published on 15 March 2023, provide for both a simplified registration framework and registration through an appointed tax representative for non-resident suppliers making taxable supplies through the internet, an electronic platform or a digital marketplace.

Application for VAT registration 

VAT registration in Kenya is through an online application made via the KRA’s online platform known as iTax. Once a taxpayer makes an application for registration, they are issued with a tax registration certificate and a taxpayer’s PIN. A PIN certificate is issued within a few hours of making a successful registration application. 

The following documents are required for VAT registration of a company incorporated in Kenya: 

• certificate of incorporation or a certificate of compliance in the case of a branch 

• PIN details of at least one director of the company. In the case of non-resident directors, the PIN details of the company secretary would suffice. 

A registered person is expected to display the tax registration certificate at the principal place of business and a copy of the certificate at every other place the person carries on business.

The regulations require persons making taxable supplies over the internet, an electronic platform or a digital marketplace to register within 30 days of making the taxable supplies.

Deregistration 

If a registered person ceases to make taxable supplies, they must notify the Commissioner of the date of cessation and furnish him with a return showing details of all goods in stock and taxable assets within 30 days from the date the registered person ceased to make taxable supplies. 

If the value of the registered person’s taxable supplies in any 12 months period does not exceed KES 5m, and they do not expect any increase in such supplies in the next 12 months, they may also apply to the Commissioner for deregistration. 

In addition, the VAT legislation provides for instances where the Commissioner may, by notice in writing, cancel the registration of a person who is no longer required to be registered if the Commissioner is satisfied that the person has not: 

• kept proper tax records 

• furnished regular and reliable returns, or 

• complied with obligations under other revenue laws, and there are reasonable grounds to believe that the person will not keep proper records or furnish regular and reliable returns. 

The cancellation of a person’s registration takes effect from the date specified in the cancellation notification from KRA. Where a person’s registration is cancelled, they will be required to submit a final return and pay all taxes due within 15 days after the date of cancellation of the registration.

Post-deregistration VAT 

A person whose registration is cancelled (deregistered) is deemed to have made a taxable supply of any trading stock on hand at the time the registration is cancelled. However, this deeming provision only applies if the person was allowed an input tax credit on the acquisition or import of the stock, or in respect of the acquisition or import of goods that have been subsumed into that stock. 

The taxable supplies shall be deemed to have been made by the person immediately before the person’s deregistration and the person shall be liable for an amount of output tax in respect of the supply equal to the amount of input tax credit allowed to the person on acquisition or import of the stock.

Claim for relief on pre-registration VAT and change in status 

The VAT legislation provides that a person may claim input tax relief in the prescribed form within three months from the date they become eligible where: 

• on the date exempt supplies made by a registered person become taxable, and the person had incurred input tax on such supplies, or 

• on the date they are registered, a person has incurred tax on taxable supplies that are intended for use in making taxable supplies, provided such supplies were purchased, within the period of 24 months immediately preceding registration or the exempt supplies becoming taxable. 

Where the Commissioner is satisfied that the claim for relief is justified, they shall authorise the registered person to make the appropriate deduction of the relief from the tax payable on their next VAT return.

Taxable value, place of supply and time of supply

Taxable value 

The ‘taxable value’ of a supply, including supply of imported services, is the consideration paid/payable for the supply. However, where the supplier and purchaser are related parties, the VAT legislation provides the taxable value of such supplies to be the ‘open market value’ of the supply. The VAT regulations define ‘open market value’ to be the consideration that a supply can reasonably fetch in an arm’s length transaction at the time of supply. 

The taxable value includes any incidental costs incurred by the supplier to provide the services, including any taxes, duties, levies, fees, and charges (other than value added tax) paid or payable on the supply.

Place of supply 

A supply of goods occurs in Kenya if: 

• the goods are delivered or made available in Kenya 

• the supply of goods involves their installation or assembly in Kenya 

• where the goods are delivered outside Kenya, the goods were in Kenya when their transportation commenced. 

A supply of services is made in Kenya if: 

• the supplier’s place of business from which the services are supplied is in Kenya 

• the place of business of the supplier is not in Kenya, a supply of services shall be deemed to be made in Kenya if the recipient of the supply is not a VAT registered person in the following instances where the services are: 

  • physically performed in Kenya by a person who is in Kenya at the time of supply 

  • directly related to immovable property in Kenya 

  • radio or television broadcasting services received at an address in Kenya 

  • electronic services delivered to a person in Kenya at the time of supply 

  • the supply is a transfer or assignment of, or grant of a right to use, a copyright, patent, trademark, or similar right in Kenya.

Time of supply 

Generally, the time of supply of goods and services, including supply of imported services, is the earlier of: 

• the date the goods are delivered, or services performed 

• for construction works, the date a certificate is issued

• the date an invoice for the supply is issued

• the date payment for the supply is received (in whole or in part) 

However, for supplies through machines operated by use of coins, notes or tokens, the time of supply shall be the date of withdrawal of the coins, notes or tokens from the relevant machine. In cases of successive supplies, the time of supply shall be the earlier of the date when payment for each successive supply is due or received. 

The time of supply of imported goods is: 

• for goods cleared for home use - the time of customs clearance 

• for goods cleared to a licensed warehouse - the time of final clearance from the warehouse for home use 

• for goods cleared to an export processing zone (EPZ) or a special economic zone (SEZ) - the time of clearance for home use 

• in any other case, the time the goods are brought into Kenya. 

Taxable supplies by a registered person for use outside the person’s business 

The VAT Regulations provide that an application of taxable goods or services by a registered person for use outside their business shall not be treated as a taxable supply unless the registered person has been allowed a deduction for input tax in respect of the taxable supply.

Output tax

Exempt supplies 

Persons that deal exclusively in making exempt supplies are not required to register for VAT. By extension, such persons are not allowed to claim relief for input tax in relation to the goods and services they consume. 

Exempt supplies (goods and services) include, but are not limited to: 

• supply of financial services 

• supply of insurance and reinsurance services

• supply of education services

• supply of agricultural, animal husbandry and horticultural services 

• supply of medical, veterinary, dental, ambulance and nursing services 

• transportation of passengers by any means of conveyance excluding international air transport or where the means of conveyance is hired or chartered 

• supply by way of sale, leasing, renting, letting of land or residential premises 

• solar equipment and accessories 

• taxable goods used in geothermal, oil or mine prospecting or exploration.

• goods for direct and exclusive use in official aid funded projects 

• plant and machinery used for construction of plastics recycling plant

• prefabricated biogas digesters, biogas, supply of denatured ethanol, sustainable fuel briquettes for household and commercial use. 

• goods imported or purchased locally for the direct and exclusive use in the construction of houses under an affordable housing scheme 

• tea and coffee brokerage services

• betting, gaming and lottery services

• postal services

• personal protective equipment (PPE), including facemasks, for use by medical personnel in registered hospitals and clinics, or by members of the public in the case of a pandemic or a notifiable infectious disease 

• hiring, leasing and chartering of aircrafts excluding helicopters of certain tariff numbers

• the transfer of assets and other transactions related to the transfer of assets into real estate investment trusts and asset-backed securities.

Zero-rated supplies

Zero-rated supplies include, but are not limited to:

• export of goods

• export of services in respect of business process outsourcing.

• supplies of goods or taxable services to Export Processing Zones (EPZ) and Special Economic Zones (SEZ) enterprises 

• transportation of passengers by air carriers on international flights 

• tea and coffee supplied for export to coffee and tea auction centres 

• goods purchased from duty free shops by passengers departing to places outside Kenya 

• taxable services in respect of goods in transit 

• inputs or raw materials supplied to pharmaceutical manufacturers in Kenya for manufacturing medicaments 

• supply of inputs or raw materials to manufacturers of agricultural pest control 

• fertilisers of Chapter 31

• supply to the Commonwealth and other governments, diplomats or first arrivals persons, donor agencies with bilateral or multilateral agreements, international and regional organisations, War Graves Commission, National Red Cross Society and St. John Ambulance     

• supply of ordinary bread.

Input tax

Input tax deductible 

The VAT legislation provides for deduction of VAT incurred in making taxable supplies as input tax credits against VAT charged (output tax) within a period of six months from the date when VAT is incurred subject to:

• availability of the following supporting documents:

  • an original tax invoice issued for the supply or a certified copy of the tax invoice, or 

  • a customs entry duly certified by the proper officer and a receipt for payment of tax, or 

  • a credit note or a debit note as defined in the VAT legislation 

  • in the case of participation in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded warehouse facility - the custom entry showing the name of the winner of the tender and the name of the oil marketing company participating in the tender 

•  the registered supplier has declared the sales invoice in a return.

Where output tax exceeds input tax in any tax period (calendar month), the registered person is required to pay the difference to the KRA as VAT payable. 

Conversely, where input tax exceeds output tax, the registered person can claim a VAT refund where excess input tax arises from making zero-rated supplies. In any other case, the taxpayer is required to carry forward the excess input tax balance for offset against output tax in subsequent tax periods. 

As an exception to the above rule, the VAT legislation allows manufacturers to make a deduction for input tax with respect to VAT exempt supplies made to an ‘official aid funded’ project as may be approved by the Cabinet Secretary to the National Treasury. The VAT Act exempts from taxation goods imported or purchased for direct and exclusive use in the implementation of official aid funded projects.

Time limits 

Apportionment of input tax 

In instances where a registered person makes both taxable supplies and non-taxable supplies (exempt and out of scope supplies), the following criteria is used to determine the deductible input tax: 

• input tax relating to taxable supplies is deductible in full

• input tax relating to ‘other use’ is not deductible

• input tax relating to the making of partly taxable supplies and partly other uses is determined by the following formula:

Total amount of input tax payable on qualifying supplies X value of all taxable supplies made during the tax period / Value of all supplies made during the period

Input tax subject to apportionment is: 

• deductible in full if taxable supplies are more than 90% of the total supplies, and 

• not deductible in its entirety if taxable supplies are less than 10% of the total supplies. 

These rules are summarised in the in table below:

Table 1

VAT apportionment is to be determined on a period-by-period basis. A ‘tax period’ is defined to mean one calendar month. In addition, the Kenyan VAT legislation does not provide for annual input tax adjustment or special methods of apportionment of input VAT other than the turnover method.

Restriction on input tax deduction 

The deduction of input tax incurred on the following supplies is specifically restricted by the VAT legislation: 

• entertainment, restaurant and accommodation services unless the services are provided in the ordinary course of the business carried on by the person to provide the services and the services are not supplied to an associate or employee; or the services are provided while the recipient is away from home for the purposes of the business of the recipient

• acquisition, leasing, or hiring of passenger cars and minibuses, bodies, parts, oils and services for their repair, unless they are acquired for the purpose of making a taxable supply of that automobile in the ordinary course of business.

VAT refunds 

How do VAT refunds arise? 

VAT refunds arise in the following circumstances:

• where a registered person makes zero-rated supplies 

• where the VAT credit arises from tax withheld by appointed withholding tax agents 

• bad debt relief where a registered person has made a supply and has accounted for and paid tax but has not received payment from the recipient of the supply 

• where VAT has been paid in error. 

A registered person who makes taxable supplies at both the standard rate and zero rate shall only be entitled to a refund arising from making zero-rated supplies. The refund shall be apportioned based on the proportion of the total value of zero-rated supplies to the total value of taxable supplies made in the month using the formula below: 

Total value of zero-rated supplies X deductible input tax for the month of supply / Total value of taxable supplies

Timelines for VAT refund claims

VAT refund claims are to be lodged within 24 months from the date when the tax becomes due and payable. 

The VAT Act, effective 23 July 2019, allows a taxpayer to offset any excess VAT credits arising from withholding VAT against any taxes due and payable subject to verification by the KRA. 

The Tax Procedures Act, 2015 (the TPA) provides that the Commissioner shall repay overpaid taxes within a period of two years from the date of refund application, failure to which the amount due shall attract interest of 1% per month or part thereof. 

Effective 1 July 2022, the TPA also provides that the Commissioner shall ascertain and determine an application for refund of overpaid taxes within 90 days of the application. If the Commissioner fails to issue a decision, the application is deemed ascertained and payable.

Witholding VAT obligations

The Commissioner for KRA may appoint a person to withhold VAT (WH VAT) equivalent to 2% of the taxable value on purchasing taxable supplies (excluding zero-rated supplies) at the time of paying for the supplies and remit the same directly to the Commissioner. 

WH VAT in Kenya was introduced as an enforcement measure by the government to ensure additional visibility and accountability in relation to VAT charged. The Finance Act, 2014 amended the VAT Act, 2013 and re-introduced WH VAT at the rate of 6% of the taxable value on purchasing taxable supplies. Subsequently, the Finance Act, 2019 in a move to address taxpayers’ cash flow burden as a result of WH VAT, reduced the WH VAT rate to 2% of the taxable value.

The VAT withheld should be remitted to the Commissioner on or before the 20th day of the subsequent month in which the withholding is effected. A person who fails to pay the withheld VAT to the KRA on the due date shall be liable on conviction to a penalty of 10% of the amount involved. Further, a person who fails to withhold VAT and remit the same to KRA is liable to recovery measures by the KRA of the tax due, penalties and interests arising thereon from the date on which the amount of tax should have been remitted to the Commissioner. 

Previously, the Commissioner had powers to exempt certain taxpayers from WH VAT obligations. However, the exemption provision has since been cancelled, hence taxpayers with perpetual VAT credit because of the application of WH VAT will no longer have a reprieve. However, taxpayers are eligible for a VAT refund of credits as a result of WH VAT subject to review and approval by the Commissioner.

International trade

VAT on imported goods 

The term importation means to bring or cause to be brought into Kenya, goods from a foreign country or from an EPZ or from an SEZ enterprise. Importer in relation to goods means the person who owns the goods, or any other person who is, for the time being, in possession of or beneficially interested in the goods at the time of importation. 

No input tax may be deducted in relation to imported goods unless a registered person is in possession of: 

• an original tax invoice or certified copy 

• a customs entry duly certified by the proper officer and a receipt for the payment of tax, or 

• a customs receipt and a certificate signed by the Commissioner of customs services stating the amount of tax paid in the case of goods purchased from a customs auction 

• a credit note, or 

• a debit note.

The taxable value of imported goods is the sum of: 

• customs value and including any customs duty/levy paid in accordance with the East Africa Community Custom Management Act (EACCMA) 

• freight and insurance costs, and 

• cost of incidental or ancillary services associated with the importation of the goods. 

The tax legislation gives the Commissioner of customs powers to: 

• collect VAT payable on imported goods at the time of importation, or

• make arrangements for such functions to be performed on his behalf in respect of imported goods through the postal service. 

A person shall not be allowed to obtain imported goods out of customs control unless the person has paid, and in full the correct amount of tax due on the imported goods.

VAT on imported services 

The Finance Act, 2019 amended the definition of supply of imported services to include supplies made to persons not registered for VAT effective 7 November 2019. Previously, a supply qualified as an imported service if it was made by a non-resident person who is not registered for VAT to a VAT registered person. 

Pursuant to this amendment, VAT on imported services from non-resident persons shall be the liability of both registered and non-registered persons. 

If a supply of imported taxable services is made to a recipient in Kenya, the recipient shall be deemed to have made a taxable supply to themselves. Notably, this provision of self supply does not apply to taxable supplies made over the electronic network, internet or a digital marketplace. Where a recipient is engaged in making fully taxable supplies and is entitled to a full credit of input tax, the taxable value of the imported service is reduced to zero, hence no VAT is payable. 

Where a person supplies fully exempt supplies or where the proportion of exempt supplies is more than 90% of the total supplies, VAT at the standard rate is due on the full value of the imported services and should be accounted for as output VAT by the importer of the services. 

Where the imported services are used in making both taxable and exempt supplies and cannot be directly attributed to either taxable or exempt supplies, the person will be required to pay VAT at the standard rate on imported services on the value of such services attributable to the exempt supply.

The inverse of the partial attribution formula discussed under the input tax deduction section above is used to determine the amount of VAT payable. 

The tax point for imported services is the earlier of the date: 

• when the services are performed 

• a certificate is issued by an architect, surveyor or any other person acting in a supervisory capacity 

• the invoice for the service is received, or

• on which full or partial payment is made for the service.

VAT on export of goods 

The VAT Act defines an export to mean to take or cause to be taken from Kenya to a foreign country, a SEZ enterprise or to an EPZ. Export of goods is subject to VAT at the rate of 0%. A registered person is required to hold the following documents as proof/ evidence of exportation and to qualify to charge VAT at the zero rate: 

• a copy of the invoice showing the recipient of the goods to be a person outside Kenya 

• proof of payment for the supply 

• a copy of:

  • the bill of lading, road manifest, or airway bill 

  • the export or transfer entry certified by a proper officer of customs at the port of exit 

  • certificate of export issued by customs

  • for excisable goods, as per the provisions of the Excise Duty Act

Where the Commissioner for the KRA has reasonable grounds to believe that goods alleged to have been exported have not been exported, the Commissioner may require evidence from a competent authority outside Kenya confirming that the goods were duly landed and entered for home consumption at a place outside Kenya. Otherwise, the Commissioner shall treat the supply as not exported out of Kenya and subject them to standard rate VAT.

VAT on export of services 

The VAT Act 2013 defines a service exported out of Kenya to mean a service provided for use or consumption outside Kenya. With effect from 1 July 2022, the export of services is standard rated except if the services are in respect of business process outsourcing, which is zero rated. It is important to note that business process outsourcing is not defined in the Act . Prior to 1 July 2021, the export of services was a zero rated supply. 

Between 1 July 2021 and 30 June 2022, the export of services was an exempt supply.  Accordingly, persons solely providing exported services were not required to register for VAT in this period. The law requires persons providing taxable exported services to register and account for VAT.

Further, the VAT Regulations, 2017, provide that a service qualifies as an ‘export of service’ where the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption, or enjoyment outside Kenya irrespective of where the payment is made from. 

It is notable that the terms ‘use’ and ‘consumption’ are not defined in the VAT Act, 2013. As such, the determination of ‘use’ and/or ‘consumption’ has been the subject of numerous disputes between the Kenya Revenue Authority and taxpayers which have been arbitrated at the Tax Appeals Tribunal and the High Court. 

Documentation required as proof of exportation of services includes: 

• a copy of the invoice to the recipient 

• proof of payment, and 

• such other documents to prove that services were used/consumed outside Kenya.

VAT compliance

Returns and payment of VAT 

VAT returns are to be filed through the revenue authority’s online platform, iTax, on or before the 20th day after the end of a tax period. The VAT returns are to be filed through the VAT 3 return form, which is an iTax generated form. No manual filing of VAT returns is accepted by the KRA effective 1 August 2015 when iTax filing became compulsory for all taxpayers. 

The Tax Procedures Act, 2015 provides that a person may apply to the Commissioner in writing for an extension of time to submit a VAT return, provided that the application shall be made at least 15 days before the due date for the tax period. 

Upon request for extension, the Commissioner is required to respond at least five (5) days before the due date otherwise the request by the taxpayer is deemed accepted. The penalty for late submission is not applicable where an extension to file a return is granted. However, the grant of an extension of time to submit a VAT return does not alter the date for payment of any tax due (‘original due date’) under the VAT return.

Interest and penalties applicable for late filing and late payment of VAT 

Late submission of a VAT return attracts a penalty of 5% of the amount of tax payable under the return or KES10,000, whichever is higher. 

Late payment of VAT will result in a late payment penalty of 5% of the tax due and payable plus late payment interest on the outstanding tax balance at a rate of 1% simple interest per month.

Tax decisions, objections and appeals

Tax decisions, objection to tax decisions and issuance of objection decisions by the Commissioner 

A ‘tax decision’ is defined in the Tax Procedures Act, 2015 as an assessment, a determination of the amount of tax payable or that will become payable by a taxpayer, a determination of liability to pay tax, a decision on an application by a self-assessment taxpayer, a refund decision or a demand for a penalty. 

A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within 30 days of being notified of the tax decision. For the notice of objection to be considered as validly lodged, the taxpayer should state precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments. In addition, the taxpayer is required to have paid the entire amount of tax due under the assessment that is not in dispute or has applied for extension of time to pay the tax not in dispute. 

The above said, a taxpayer may apply for an extension of time to file the objection notice if the taxpayer was prevented from lodging the notice of objection within the prescribed period because of an absence from Kenya, sickness or other reasonable cause, provided the taxpayer did not unreasonably delay lodging the notice of objection. 

The Commissioner is legally required to give an objection decision within 60 days from the date of receipt of the notice of objection or from the date the Commissioner requests any further information from the taxpayer failure to which the objection shall be deemed to be allowed. An objection decision shall include a statement of findings on the material facts and the reasons for the decision.

Appeals to the tax appeals tribunal 

Where a person disputes an appealable decision of the Commissioner on any matter subsequent to an objection, they may give notice in writing to the tax appeals tribunal, which is the next course of redress available for any aggrieved taxpayer. 

The taxpayer is required to file the notice of intention to appeal to the tribunal within 30 days of being notified of the decision, provided that before appealing the person shall be required to pay a non -refundable fee of KES 20,000. In addition, tax legislation provides that the notice of appeal to the tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice. 

Proceedings before the tribunal are of a judicial nature. For the hearing of proceedings before the tribunal, the taxpayer may appear in person or be represented by a tax agent or by an advocate. 

The legislation also allows the parties in a dispute, at any stage during the proceedings, to apply to have the dispute settled out of the tribunal. This may be achieved through having negotiations with the KRA on a without prejudice basis under the alternative dispute resolution (ADR) framework. Where the tribunal allows the parties to settle the dispute outside the tribunal, the parties are required to reach a settlement within 90 days, failing which the dispute is referred back to the tribunal for adjudication.

Appeals to the High Court 

A party to an appeal who is dissatisfied with the decision of the tribunal on the appeal (the appellant) may appeal to the high court within 30 days of being notified of the decision. Thereafter, the appellant is required to file the substantive appeal documents with the court within 30 days. Further, a party to an appeal who is dissatisfied with the decision of the high court may appeal to the court of appeal within 30 days of being notified of the decision. 

Similar to the tribunal, a party to a dispute at the high court may at any stage during the proceedings, apply to the court to be allowed to settle the matter out of the court. Where the court allows the parties to settle the dispute outside the court, the parties are required to reach a settlement within 90 days from the date the court permits the matter to be heard outside the court. Where parties fail to settle the dispute within the 90 days, the dispute is referred back to the court for hearing and adjudication.

VAT records and documentation

VAT record-keeping 

All persons doing business in Kenya are required to keep, in the course of their business, a full and true written record, whether in electronic form or otherwise in the official languages (English or Kiswahili), of every transaction made for a period of five years from the date of the last entry made. The records are to be kept in Kenya for the five-year statutory period.

The records to be maintained include the following: 

• copies of all tax invoices or simplified tax invoices (cash sale receipt) issued in serial number order 

• copies of all credit notes and debit notes issued in chronological order 

• purchase invoices, customs entries, receipts for the payment of customs duty or tax 

• details of the amounts of tax charged on each supply made or received 

• tax account showing the totals of the output tax and the input tax of each period and a net total of tax payable or excess tax carried forward 

• stock records 

• details of each supply of goods and services from the business premises. 

The unit of currency for tax invoices shall be Kenyan shillings (KES). Where an invoice is issued in another/foreign currency, the KES equivalent should be at least added to the face of the invoice. 

Failure to retain or maintain a document as required under a tax law without reasonable cause for a period is an offence and attracts a penalty equal to the higher of 10% of the amount of tax payable under the tax law to which the document relates or KES100,000 where no tax is payable.

Requirements of a valid tax invoice

On 25 September 2020, the VAT (Electronic Tax Invoices) Regulations, 2020 were gazetted repealing the predecessor provisions in VAT Regulations, 2017 on the requirements of a valid tax invoice. The 2020 regulations have made it mandatory for VAT registered persons to issue invoices through a tax register.

All taxpayers were required to comply with the implementation of the Tax Invoice Management System by 1 December 2022 . It is expected that the implementation of the regulations will ensure real time transmission of transactions and information to the KRA. The KRA will be able to use data analytics on a real time basis to flag out taxpayers who have not declared their supplies correctly. Subsequently, in February 2023, the KRA rolled out an Electronic Tax Invoice Management System (eTIMS) as an enhancement of TIMS. It is believed that both systems will work concurrently, and taxpayers have a choice on which system to employ in their business.

The VAT (Electronic Tax Invoices) Regulations, 2020 provide that a valid tax invoice shall be generated through a tax register and should contain the following: 

• the PIN of the registered user of a register

• the time and date of issuance

• the serial number of the invoice

• the buyer’s PIN

• the total gross amount

• the total tax amount

• the item code of suppliers for exempt, zero-rated and other rate supplies

• a brief description of goods and services

• the quantity of supply

• the unit of measure

• the tax rate charged

• the unique register identifier

• the unique invoice identifier

• a quick response (QR) code.

Tax invoice for supplies of imported services

The VAT Regulations, 2017 require a registered person who imports services and is entitled to a credit for part of the amount of input tax payable to prepare a tax invoice, in respect of the supply of imported services, containing the following: 

• 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.

Credit notes 

The VAT legislation provides for instances where a taxpayer may issue a credit note. Specifically, a credit note is issued: 

• for the amount of reduction where goods are returned to a registered person 

• where for a good and valid reason, the registered person decides for business reasons, to reduce the value of supply after the issue of a tax invoice. 

The VAT legislation provides that such a credit note may only be issued within six months after the issuance of the relevant tax invoice and within 30 days where there was a commercial dispute in court with regard to the price payable after the matter has been determined. 

In addition, a registered person who issues a credit note is required to reduce the amount of output tax in the tax period in which the credit note was issued by an amount that bears the same proportion to the tax originally charged. The amount of tax so credited shall be specified in the credit note. 

Further, a registered person who receives a credit note for a supply in respect of which they had claimed deductible input tax is required to reduce the amount of deductible input tax by the amount of tax credited in the month of which the credit note is received. 

A valid credit note should contain the following: 

• 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 

• 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, the correct amount of the consideration, the difference between those two amounts, and the amount of tax that relates to the difference.

Debit notes

A debit note is issued where a registered person has issued a tax invoice in respect of a taxable supply and subsequently makes a further charge in respect of that supply or any transaction associated with that supply. The debit note should display details of the tax invoice issued at the time of the original supply. 

A registered person who receives a debit note is eligible to claim a deductible input tax for the further charge in the month the further charge was made or in the subsequent month provided that the deduction had not been previously claimed. 

A valid debit note should contain the following: 

• 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, the correct amount of the consideration, the difference between those two amounts, and the amount of tax that relates to the difference.

Specific VAT rules

VAT for the digital marketplace 

VAT is applicable to supplies made over the Internet or an electronic platform or through a digital marketplace. A ‘digital marketplace’ means an online platform that enables users to sell goods or provide services to other users.

The VAT legislation provides that the Cabinet Secretary for the National Treasury (CS) shall make regulations to provide the mechanisms for implementing the provisions of this amendment. To this effect, on 9 October 2020, the CS gazetted the VAT (Digital Marketplace Supply) Regulations 2020 with a six-month transition period. This means affected suppliers were required to register for VAT by April 2021. Consequently, on 15 March 2023, the CS gazetted The VAT (Electronic, Internet or Digital Marketplace Supply) Regulations 2023 which revoked the VAT (Digital Marketplace Supply) Regulations 2020. 

The scope of taxable supplies under the newly published regulations include:

• downloadable digital content including downloadable mobile applications, e-books and films

• subscription-based media including news, magazines and journals

• over-the-top services including streaming television shows, music, podcasts and any form of digital content

• software programmes including software, drivers, website filters and firewalls

• electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services

• music and games

• search engine and automated helpdesk services including customisable search engine services

• music and games

• tickets for live events, theatres or restaurants

• online education programmes including distance teaching programmes through pre-recorded media or e-learning, education webcasts, online courses and training, but excluding education services exempted under the VAT Act

• digital content for listening, viewing or playing on any audio, visual or digital media

• services that link the supplier to the recipient including transport hailing services or platforms

• electronic services (defined under place of supply above)

• sales, licensing or any other form of monetizing data generated from users’ activities

• facilitation of payment for exchange or transfer of digital assets, excluding services exempted under the VAT Act

• any other service provided through an electronic, internet and  digital marketplace that is not listed as exempt in the VAT Act.

The VAT (DMPS) Regulations are primarily targeted at all supplies made using a digital marketplace. Previously the law expressly provided for business-to-consumer (B2C) suppliers of services only. However, through legal gazette number 68 of 2022, the Regulations were amended to remove the distinction between B2C and B2B services as it relates to digital marketplace supplies.

VAT liable suppliers shall register for tax in Kenya within 30 days of making taxable supplies through the simplified tax registration framework, or appoint a tax representative to administer their tax obligations in Kenya. 

Registration under the simplified tax framework shall be conducted online through a prescribed form and upon issuance of the following information:

• the name of the business including the business’ trading name

• the name of the contact person responsible for tax matters

• the postal address or registered address of the business and its contact person

• the telephone number and email address of the contact person

• the websites or uniform resource locators (URLs) of the supplier

• the national identification tax number issued to the supplier in their jurisdiction

• the certificate of incorporation or registration issued to the business in the country of incorporation

• any other information that the Commissioner may require

Place of supply The place of supply is deemed to be Kenya where the recipient of the taxable supply is in Kenya.The ‘recipient’ is defined as the person to whom the supply is made. To determine if the recipient of the service is in Kenya, the Commissioner considers whether the payment proxy, residence proxy and access proxy are in Kenya.

Time of Supply

The time of supply on the digital marketplace is the earlier of the date on which the payment for the supply is received in whole or in part; or the date on which the invoice or receipt for the supply is issued. 

Exemption from issuing a tax invoice

There is no requirement to issue electronic tax invoices for supplies made by non-resident suppliers, provided that the supplier shall issue an invoice or a receipt that will be deemed to be a tax invoice.

Input tax deductibility

Claim for input deduction is not allowed for transactions relating to electronic, internet or digital marketplace supply.

VAT treatment of bad debts 

A VAT registered person who has made a supply and paid tax on that supply can apply for refund or remission of the VAT paid under the following circumstances: 

• where three years have elapsed since the date of that supply, and the debt has not been recovered 

• before three years have elapsed where the debtor has been declared legally insolvent 

• where the debt is not more than four years old 

• where the taxpayer can prove that reasonable attempts have been made without success to collect the debt. 

In essence, the law allows for only one year for application of the relief - that is, between the lapse of the third year and fourth year since the date of the supply. Taxpayers ought to pay attention to this specific statutory timeline in seeking VAT refunds arising from bad debts. The VAT Act does not provide other administrative conditions to be fulfilled during processing of refund arising from bad debts.

Land and buildings

The sale, renting, leasing, hiring, or letting of land and residential buildings is exempt from VAT. The exemption does not apply in respect of car park services or conference or exhibition services, except where they are provided for educational institutions as part of learning. 

However, the sale, renting, leasing, hiring or letting of buildings used for non-residential purposes is subject to VAT. 

In 2020, the High Court held that improvements on a piece of land, whether for commercial or residential purposes at the point of disposal, were considered as part and parcel of the land hence exempt from VAT. The KRA has appealed the high court ruling and, at the time of this publication, the Court of Appeal had not made a determination on the matter.

Voluntary Tax Disclosure Programme 

The Finance Act 2020 introduced Voluntary Tax Disclosure Programme (VTDP) to run for a period of three years commencing 1 January 2021, where a person shall disclose any tax liabilities to the Commissioner for the purposes of being granted relief of penalties and interest on the principal tax disclosed. 

The application shall be made in a prescribed form for tax liabilities accrued within five years prior to 1 July 2020.

Once the Commissioner approves the application, the relief shall be granted as follows:

• a full remission (100%) on interest and penalties, where disclosure is made and full tax liability paid in the first year (2021)

• a 50% remission, where disclosure is made and tax liability paid in the second year (2022)

• a 25% remission, where disclosure is made and tax liability paid in the third and final year (2023).

The Commissioner shall enter into an agreement with a taxpayer setting out the terms and period of payment (which shall not exceed one year). Where a person fails to honour the agreement, they shall be liable to pay the full interest and penalties that had been remitted.

VTDP does not apply to any person undergoing an audit, a compliance review, investigation, ongoing litigation in respect of a tax liability or has been notified of a pending audit or investigation by the Commissioner.

Other indirect taxes

Excise duty

Excise duty is a tax imposed on excisable services or excisable goods manufactured in or imported into Kenya. Excise duty is governed by the Excise Duty Act, 2015. 

Excise duty must be accounted for on certain manufactured goods, including alcoholic and non-alcoholic beverages, luxury goods, soft drinks, bottled water, juices, sugar confectionery (including  imported white chocolate), tobacco products, petroleum products, imported gas cylinders, cosmetics and vehicles.

The Finance Act 2021 introduced excise duty on certain food products such as imported pasta, imported eggs, imported onion, imported potatoes, potato crisps and potato chips. Additionally, excise duty is now applicable on imported furniture, plastics, nicotine products and unsaturated polyester.

Excise duty is also applicable to excisable services such as telephone and Internet data services at 20%; fees charged for money transfer services by banks, money transfer agencies and other financial services providers at 20%; fees charged for money transfer services by cellular phone service providers at 12%; other fees charged by financial institutions at 20%; betting, gaming and lottery at the rate of 7.5% except for horse racing and charitable lotteries. Fees charged by digital lenders at a rate of 20% and importation of cellular phones shall be 10% of the excisable value.

Import duty

Import duty is imposed on goods imported into Kenya. The rate will depend on the East African Community Common External Tariff (EACCET) in respect of the goods. The import duty rates range from 0% to 35%. The import duty rates and their application are governed by the East African Community Customs Management Act (EACCMA), which is applicable across all the East African Community partner states.

Import declaration fee

Import declaration fee (IDF) is charged at the rate of 3.5% of the customs value of the goods imported into Kenya for home use. However, there is a reduced IDF rate of 1.5% on the customs value on raw materials and intermediate products imported by approved manufacturers and also inputs for construction of houses under the affordable housing scheme approved by the cabinet secretaries responsible for industry and housing respectively. 

Goods valued at KES 5bn or more imported in the interest of the public or to promote an investment are exempt from IDF.

Railway development levy

Railway development levy (RDL) is levied at the rate of 2% on the customs value of the goods imported into the country for home use. However, the law provides for a lower RDL rate of 1.5% on raw material and intermediate products imported by manufacturers approved by the CS for industry and on inputs for the construction of houses under an affordable housing scheme approved by the CS for finance on the recommendation of the CS responsible for matters relating to housing. 

Goods valued at KES 5bn or more imported in the interest of the public or to promote an investment are exempt from RDL.

Export levy

Export levy is levied on goods specified in the tax legislation at the time of entering the goods for export. The tax legislation also prescribes the applicable rates for the specific goods subject to an export levy. The rates are adjusted annually by the Commissioner to take into account inflation.

Exports and investments promotion levy

To protect local industries, and provide financing for the Micro, Small, and Medium Enterprises (MSMEs) in the manufacturing sector, the government has proposed a levy called the Export and Investment Promotion Levy on certain import goods/products which the local manufacturing industries have the capacity to produce. This levy has not been enacted into law. The government has invited members of the public to make submissions regarding the proposed law.

Anti-adulteration levy 

Anti-adulteration levy is imposed on all illuminating kerosene imported into Kenya for home use. The levy is imposed at the rate of KES 18 per litre of the customs value of the illuminating kerosene. This levy is paid by the importer at the time of bringing in the illuminating kerosene into Kenya. 

The Miscellaneous Fees and Levies Act further provides that the Commissioner shall refund the levy upon written application by an importer where the Commissioner is satisfied that the levy was paid in respect of illuminating kerosene that has subsequently been used by a licensed or registered manufacturer to manufacture paint, resin or shoe polish.

Stamp duty 

Stamp duty rates vary from 0.15% to 4%. Stamp duty is applicable to: 

• transfer of immovable property 

• transfer of unquoted stock or marketable securities 

• creation or increase of share capital leases 

• grant of security over assets.