Value Added Tax
Indirect Taxes
Value Added Tax
Syllabus tag: KASNEB CPA | Intermediate Level | CA26 Public Finance and Taxation | Topic 7 Value Added Tax
Rates check. The rates and thresholds below are those in force in 2026. They change with each Finance Act, so confirm the current position on the KRA website.
Lesson objectives
By the end of this topic, you will be able to:
- Explain how VAT works as a tax on consumption collected in stages
- Distinguish zero-rated from exempt supplies and say why it matters
- Compute VAT payable from output and input tax
- Extract VAT from a tax-inclusive amount
- State the registration threshold, filing obligations and eTIMS requirements
Why this matters
VAT is Kenya's largest single source of tax revenue. It is also the tax businesses most often get wrong, because the difference between zero-rated and exempt looks cosmetic and is not.
How VAT works
VAT is charged at each stage of production and distribution, but each registered business deducts the tax it paid on inputs. The net effect is that the final consumer bears the whole tax and businesses in the chain are merely collectors.
VAT payable = Output tax − Input tax
Where input tax exceeds output tax, the excess is carried forward or, in limited circumstances such as persistent zero-rated supplies, refunded.
The three categories
| Category | Rate | Input tax recoverable? |
|---|---|---|
| Standard rated | 16% | Yes |
| Zero rated | 0% | Yes |
| Exempt | no VAT charged | No |
This table contains the most examinable point in the topic. A zero-rated and an exempt supply both mean the customer pays no VAT — but the supplier's position is completely different.
A zero-rated supplier charges 0% and still reclaims all input tax, so it recovers VAT on its costs. An exempt supplier charges nothing and reclaims nothing, so the VAT on its costs becomes a real expense it must absorb or pass on in the price.
Zero rated supplies include exports and goods supplied to Export Processing Zone enterprises. Exempt supplies include most financial services, insurance, education, medical services and unprocessed agricultural produce.
A business making only exempt supplies cannot register for VAT at all, and therefore carries the VAT on everything it buys.
Computing VAT payable
A registered trader has standard-rated sales of KES 8,700,000 and standard-rated purchases of KES 5,400,000, both exclusive of VAT.
| KES | |
|---|---|
| Output tax (16% × 8,700,000) | 1,392,000 |
| Input tax (16% × 5,400,000) | (864,000) |
| VAT payable | 528,000 |
Extracting VAT from an inclusive amount
Where a figure includes VAT, the tax is 16/116 of it, not 16%.
An invoice of KES 2,320,000 including VAT:
VAT = 2,320,000 × 16/116 = KES 320,000 VAT-exclusive amount = KES 2,000,000
Applying 16% to the inclusive figure gives 371,200 and is wrong. This is one of the commonest errors in the paper.
:::checkpoint A supplier quotes KES 928,000 "VAT inclusive" and a competitor quotes KES 810,000 "plus VAT". Which is cheaper, and by how much? :::
Registration
Registration is mandatory where taxable turnover reaches KES 5 million in any twelve-month period. Voluntary registration is possible below that threshold and is often worthwhile for a business selling mainly to other registered businesses, since it can then reclaim input tax.
Note that only taxable supplies count towards the threshold. Exempt supplies do not.
Input tax that cannot be claimed
Input tax is not recoverable on:
- Passenger cars and their maintenance, unless the business deals in them
- Entertainment, restaurant and accommodation services, unless supplied in the ordinary course of that business
- Anything used to make exempt supplies
- Any purchase not supported by a valid electronic tax invoice
Input tax must be claimed within the statutory time limit from the date of the invoice. A late claim is lost.
eTIMS and compliance
The electronic Tax Invoice Management System is now mandatory. Input tax cannot be claimed unless the supplier issued a valid eTIMS invoice, which places a practical burden on buyers to check that their suppliers are compliant.
- Returns and payment are due by the 20th of the following month
- A nil return must be filed even where there were no transactions
- Records must be kept for the statutory period
Other indirect and related taxes
- Excise duty on specific goods and services — alcohol, tobacco, fuel, airtime, financial transactions
- Customs duty under the East African Community Common External Tariff
- Import VAT at 16% on customs value plus duty
- Withholding VAT, deducted by appointed agents and set against the supplier's liability
:::checkpoint A private school buys computers worth KES 4,000,000 plus VAT. Education is an exempt supply. State the VAT position on the purchase, what the school can reclaim, and what this does to the real cost of the computers. :::