If your business or company earns at least 5 million Kenyan shillings annually, paying value-added tax (VAT) is a legal requirement. You need to file VAT returns monthly, by the 20th of the following month.Businesses earning less than Ksh 5 million can register for VAT too, but this is optional.
VAT is one of the most demanding tax obligations in Kenya, and large and small businesses alike struggle with tax filing, deadlines, audits, and penalties. Whether you are a large company, a partnership, or a small and medium-sized enterprise (SME), you need to understand how VAT works. Here is what every business must know about monthly VAT filing in Kenya to stay compliant.
What is VAT?
VAT is Value Added Tax; an indirect tax imposed on every consumer for taxable goods and services supplied or imported in Kenya. In other words, whenever value is added to a product or service at any point in the production-to-consumption supply chain, VAT is imposed.
The final consumer bears the burden of all the VAT charges on a good or service, from production to consumption. Therefore, the more the VAT charges, the more expensive a good or service is for the final consumer. So, who keeps track of all the VAT imposed along the supply chain? KRA designates registered agents who collect the tax at various supply chain points and then remit it to KRA.
VAT Eligibility: Who Needs to File VAT in Kenya?
Not all businesses are required to pay VAT. Only traders and business owners who meet a certain threshold need to file VAT. This threshold is an annual turnover of Ksh. 5 million and above. If your business meets this threshold, you need to register for VAT and file monthly returns at the provided VAT rates. Does that mean any business below this threshold is not eligible for VAT in Kenya? Not necessarily. A business with less than Ksh. 5 million can voluntarily register for VAT under certain conditions.
Digital Service Providers and VAT
Digital service providers are required to register for and pay VAT at a 16% rate at the point of sale. It doesn’t matter if the business is local or foreign. KRA introduced the Digital Marketplace VAT Framework under the Finance Act, 2019. In 2021, a VAT was imposed on income earned through digital platforms. Digital service providers who are subject to this VAT obligation include:
- Streaming services like YouTube, Netflix, and Spotify.
- Online advertising sites like Google Ads, Facebook Ads, and Instagram Ads
- E-learning services like Coursera and Udemy
- Online betting platforms like Betway, 1Xbet, and 22Bet
VAT-Exempt Businesses
Certain businesses are exempt from VAT. These are traders who supply or import goods and services that are not subject to VAT. VAT-exempt supplies and services according to the First Schedule of the Finance Act 2023 include:
- Certain medical supplies
- Some agricultural supplies and services
- Financial and insurance services
Key VAT Concepts: Rates, Input and Output Tax
KRA imposes two main VAT rates: a general rate of 14% for taxable supplies and services and a zero rate (0%) for specific supplies as outlined in the Second Schedule of the Finance Act, 2023.
Update: There was a third VAT rate, an 8% rate on certain supplies like petroleum products. This rate was scrapped in July 2023 as recorded in the Finance Act, 2023.
Exempt supplies and services are not taxable, and as such, no VAT is deducted from them. A taxpayer who only trades in except supplies and services is therefore not required to register for VAT.
Output Tax vs. Input Tax in VAT
VAT tax calculation depends on two aspects: input tax and output tax. When a business person buys or imports supplies, a 16% VAT is imposed on the supplies (where applicable). This is called input tax.
On the other hand, when this trader sells the supplies to a consumer, a 16% VAT is charged on the goods, a charge that is paid by the consumer. This is called the output tax.
The VAT remittable to KRA in that month is the difference between the input tax and the output tax.
Tax Payable = Output Tax- Input Tax
Note: If the output tax is less than the input tax, the difference is carried forward to the following month as a tax credit. You will deduct this credit from the output tax of the following month.
Keeping Tax Records: ETR Machines and Electronic Tax Invoices
Electronic Tax Register (ETR) machines are special devices that every VAT-registered business must have, as mandated by KRA. They record sales transactions and generate electronic tax invoices. This data is then transmitted to the Tax Invoice Management System (TIMS).
ETR Machines are significant in VAT compliance in the following ways:
- They enhance transparency, building trust between KRA and VAT-registered businesses
- They ensure accuracy and save time that would have been used to manually record sales transactions
- They facilitate real-time reporting of VAT-related transactions to TIMS
- They reduce the risk and penalties that arise due to underreporting and sales manipulation
- They reduce discrepancies during tax audits
How To Register for VAT
The first and obvious step in VAT registration is determining eligibility. If you are eligible, follow the steps below to register for VAT:
Step 1: Prepare Relevant Documents
You need various documents to register for VAT. These are:
- KRA PIN
- KRA PINs of partners in a Partnership
- Company KRA PIN in the case of a Limited Liability Company
- Copy of Company/Business Incorporation Certificate
- Copy of Business Name Registration Certificate
- National ID Card of the taxpayer
- Alien ID for foreign business owners
- Record of actual taxable turnover of Ksh. 5 million in the past 1 year
- Physical business enterprise
- Email address
After gathering these documents, the next part is to access the iTax portal for registration.
Step 2: Log in to iTax
Use your KRA PIN and password to sign in to iTax.
Step 3: Go to the Registration Section
Navigate to the Registration menu. Click on Amend PIN Details so that you can add VAT as a tax obligation.
Step 4: Complete The VAT Application Form
Fill out the form a required, entering the needed details. These include turnover evidence, bank details, contact details, and physical business location.
Step 5: Submit the Application
Verify that your application form is filled out to the best of your ability and that every detail is accurate, then submit the application. You’ll see a Submit button at the bottom of the page. KRA will send an acknowledgement number that you can use to track your application status.
Step 6: Approval by KRA and Certificate Issuance
KRA will review your application. If you meet their conditions, they will approve your application and send you a VAT registration certificate. This certificate contains a VAT registration number that you’ll use to file VAT returns and generate electronic tax invoices.
Monthly VAT Filing in Kenya: Step-by-Step Process
As a VAT taxpayer, you’re required to file your VAT returns every month. The deadline is the 20th day of the following month. For instance, you file January VAT returns on or before the 20th day of February.
Before you can pay and file VAT returns, you need to register on the eTIMS portal. By onboarding on this platform, you can easily generate and transmit electronic tax invoices to KRA in real time.
You can integrate the TIMS software with your point of sale (POS)or enterprise resource planning (ERP) systems in your business (for large businesses) or using a mobile app (for small businesses).
After onboarding on eTIMS, you can now generate the electronic tax invoices. The invoice contains the following:
- Breakdown of the VAT tax charged on earnings.
- Invoice control number
With that, you’re now all set to pay and file your VAT monthly returns.
Note: The due date applies to both the tax payment and filing the returns. Returns are done online via the iTax portal. On the other hand, tax payments can be done via bank transfers and MPESA Paybill.
Failure to comply attracts a penalty and interest. Below are the penalties for late payment and filing of VAT returns:
- Penalty: Ksh 10,000 or 5% of the payable tax, whichever is higher.
- Interest: 1% of unpaid VAT for every month
How to File Monthly VAT Returns in Kenya
Follow these steps to pay and file your monthly VAT return:
- Go to itax and log in to your account using the KRA pin and password.
- Navigate to Payments and choose Payment Registration.
- Select VAT under the Tax head.
- Under Payment Type, choose Self-Assessment.
- Select the tax period.
- Select the liability and click Add.
- Navigate to Mode of Payment and select either Other Payment Mode or RGTS.
- Verify all the details and click Submit.
- The system will autogenerate a Payment slip. Download the slip and use it to make the payment.
- Pay the due tax using a bank transfer or M-Pesa.
That’s all. You have successfully paid and filed your monthly VAT returns to KRA.
Tips for Staying VAT Compliant in Kenya
Do you want to stay VAT compliant and avoid penalties? Follow these tips:
- Keep track of new developments and updates in KRA policy changes.
- Do your due diligence on VAT best practices.
- Invest in accounting software and ERP systems that seamlessly integrate with KRA’s TIMS.
- Consult a tax expert.
Looking to simplify your VAT compliance journey? Gichuri & Partners is your trusted tax compliance partner. We serve businesses of all sizes, from large corporations and LLPs to SMEs and start-ups. Book an appointment today.
