The following supplies fall outside the scope of the VAT system:
• supply of goods in a bonded warehouse in Kenya;
transfer or disposal of taxable assets purchased prior to the implementation of VAT on 1 January 1990;
employment services rendered by an employee to the employer in consideration for a wage or salary;
transfer of a registered business as a going concern, provided an application has been made to the Commissioner, as prescribed in the VAT regulations; and
supplies made by a person who is not required to register for VAT, for example, someone whose turnover is below the VAT registration threshold.
VAT was introduced in Kenya with effect from 1 January 1990 to replace sales tax, which had been in operation since 1973. The basic law is contained in the Value added tax Act, Cap. 476 of the Laws of Kenya, read together with the Regulations stemming from it.
The VAT authority in Kenya is the Kenya Revenue Authority (KRA).
Rates and scope
The current standard rate of VAT in Kenya is 16%. The rate applies to all taxable supplies of goods and services not qualifying for another rate of VAT or VAT exemption. There is a lower rate of 12% for electricity energy and fuel oils.
With effect from June 2006 the hotel and restaurant services are subject to a VAT rate of 16%. Such services are also subject to a catering, training and tourism development levy (CTTDL) of 2%. Hence with effect from June 2006, the cumulative rate applicable to hotel and restaurant services is 18%. Prior to June 2006, hotel and restaurant services were subject to a reduced VAT rate of 14% and the 2% CTTDL, bringing the effective combined rate to 16%, similar to the standard rate for other taxable supplies.
Suppliers of taxable goods and services are required to apply for VAT registration. These include sole proprietors, partnerships, limited liability companies and corporations.
To qualify for registration, a person must attain or expect to attain a taxable turnover of KShs5 million per year.
VAT is charged on the supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya.
In relation to taxable supplies in Kenya, only taxable persons are required to levy and pay VAT to the KRA. A taxable person is any person liable to apply for VAT registration under the VAT Act, but does not include an export processing zone (EPZ) enterprise.
If a person attains or expects to attain the above threshold, he must apply for VAT registration. Failure to register for VAT will lead to retrospective compulsory registration by the Commissioner of Domestic Taxes from the date the person became due for registration. Further, the person will be liable to a default penalty of KShs100,000. Late registration for VAT attracts a default penalty of KShs20,000.
The VAT Act provides for voluntary VAT registration when one expects to meet all determinants for registration. However, the requirement to register for VAT is mandatory once the determinants of whether one needs to be registered have been met. In all other instance there is no need to register for VAT.
Group VAT registration for a group of companies is not allowed.
Nonresident businesses are not specifically required to register for VAT. However, where the supplier of the service is a nonresident, the Commissioner may by notice in writing appoint a person who normally resides in Kenya as an agent for collecting the VAT payable on the services provided locally and remitting it to the Commissioner.
A nonresident business that has registered as a branch in Kenya can apply for VAT registration through a resident representative. If the nonresident business decides to register in Kenya, the permanent establishment or local representative should apply on behalf of the nonresident business to the local VAT office or to VAT Headquarters for registration.
Application for registration
With effect from 1 January 2009, the KRA encourages online VAT registration, which has become possible after a successful pilot test of the online registration system. The application for registration is made to the VAT Department of the KRA by means of a single form. This form must be used for all types of registrations, and only one certificate is issued for all tax obligations. It is no longer a mandatory requirement to have a VAT