Value Added Tax (VAT) is a significant source of revenue for the Kenyan government. It is imposed on the supply of goods and services at every stage of production and distribution. As a business owner or a self-employed individual, filing VAT returns is not only a legal requirement but also a crucial part of maintaining compliance with tax regulations. In Kenya, VAT returns are submitted electronically through the Kenya Revenue Authority (KRA) online platform, iTax. This blog post will walk you through the VAT filing process, ensuring you understand every step to avoid penalties and ensure compliance.

Who Should File VAT Returns?

VAT applies to businesses that supply taxable goods or services with an annual turnover exceeding Ksh 5 million. Additionally, businesses that voluntarily opt for VAT registration must file returns. Common categories include:

• Importers of goods

• Suppliers of taxable services

• Manufacturers

• Retailers and wholesalers

If you fall into any of these categories, you must file monthly VAT returns with the KRA.

Understanding VAT Rates in Kenya

Kenya imposes three VAT rates:

• Standard Rate (16%): This applies to most goods and services in Kenya.

• Zero-rated (0%): This is applied to exports and certain categories like medical supplies.

• Exempt: Some goods and services, such as financial services and certain agricultural products, are exempt from VAT.

Understanding which category your business activities fall under is crucial when filing VAT returns.

How to Register for VAT on iTax

If you are required to file VAT returns, the first step is to register your business for VAT. Here’s how to register through the iTax platform:

• Visit the KRA iTax portal https://itax.kra.go.ke.

• Log in using your KRA PIN and password.

• Navigate to the “Registration” tab and select “Amend PIN Details.”

• In the “Tax Obligation Details” section, select VAT.

• Submit your application, and KRA will review and approve your VAT registration.

Once your VAT registration is complete, you will receive a VAT Certificate from KRA.

Documents and Information Required for VAT Filing

Before you start filing your VAT returns, ensure you have the following details:

• Invoices for sales and purchases: Ensure all VAT-inclusive invoices are accurate and readily available.

• Credit notes and debit notes: Any adjustments to your VAT must be supported with these documents.

• Import declarations (if applicable): For businesses importing goods, you will need your import declaration forms (IDF) and customs documents.

• KRA PIN and iTax login credentials: This is mandatory to access the iTax platform.

Step-by-Step Process of Filing VAT Returns on iTax

Step 1: Log in to iTax Portal

Go to iTax and log in using your KRA PIN and password.

Step 2: Navigate to VAT Returns

Once logged in, navigate to the “Returns” tab, and select “File Returns.” Choose VAT as the tax obligation.

Step 3: Download the VAT Excel Template

KRA provides a VAT return form in an Excel template format (VAT3 form). Download the template and ensure it’s the correct version for the tax period.

Step 4: Fill in the VAT Template

The VAT3 template requires you to input details of your taxable sales and purchases, including:

• Sales (output VAT): Input the total sales for the period and the VAT charged at 16%, 0%, or the exempt rate.

• Purchases (input VAT): Input the total purchases and the corresponding VAT you paid.

Ensure accuracy in entering the amounts, as mistakes can result in penalties or additional scrutiny from KRA.

Step 5: Validate and Upload the Form

Once the template is fully filled, validate it using the built-in validation tool in the Excel sheet. After validation, save the validated form as a zip file.

Step 6: Upload the VAT Return

Return to the iTax portal, navigate to the “Returns” tab, and click on “Upload VAT Return.” Browse and select the validated VAT3 file, then submit.

Step 7: Acknowledge the Return

Once submitted, you will receive an acknowledgment receipt from KRA, which serves as proof of filing. You can download this receipt and save it for future reference.

Payment of VAT Due

If your VAT return shows that you owe KRA any VAT, you must make the payment by the due date, which is the 20th of the following month. Late payment or failure to file on time will attract penalties.

Payment Methods

• iTax Pay: You can generate a payment slip through iTax and pay via banks or mobile money services like M-Pesa.

• Bank Transfer: Payments can be made directly to KRA through its partner banks.

• Real-Time Gross Settlement (RTGS): For larger amounts, RTGS can be used.

After making payment, you should receive an e-slip and an acknowledgment from KRA that your VAT has been paid.

VAT Refunds and Credits

If your input VAT (the VAT you pay on purchases) exceeds your output VAT (the VAT you charge on sales), you may be eligible for a refund. KRA allows VAT-registered businesses to apply for a refund under certain conditions. However, this process can be lengthy, and you must provide sufficient documentation to support your claim.

You can also carry forward any excess input VAT to offset future VAT liabilities.

Penalties for Late Filing or Payment

Failure to file VAT returns or pay VAT on time can result in penalties, including:

• Late filing penalty: Ksh 10,000 or 5% of the VAT payable, whichever is higher.

• Late payment penalty: 5% of the VAT due, plus 2% interest per month on the outstanding amount.

To avoid these penalties, it is essential to file your VAT returns on time and ensure payment is made by the due date.

Common Mistakes to Avoid When Filing VAT Returns

• Failing to keep proper records: Ensure all invoices and receipts are kept for at least five years as KRA may request them for audits.

• Incorrect VAT calculations: Always double-check your input and output VAT amounts to avoid errors.

• Failing to file nil returns: Even if no business was conducted, VAT-registered businesses are required to file a nil return.

Conclusion

Filing VAT returns in Kenya may seem complex, but with the iTax system and proper record-keeping, the process is relatively straightforward. Following the steps outlined in this guide will help you file your returns correctly and on time, avoiding penalties and ensuring that your business stays compliant with Kenyan tax laws. If you have any difficulties or need professional assistance, feel free to reach out to Gichuri & Partners for expert VAT filing services.