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Kenya - Indirect Tax Guide

Kenya - Indirect Tax Guide

Explore the requirements and rules that apply to indirect taxes in Kenya.

Explore the requirements and rules that apply to indirect taxes in Kenya.

Three people carrying wood at their back walking towards the mountain

General

Types of indirect taxes (VAT/GST)

VAT.

What is standard VAT/GST rate?

16 percent.

Are there any reduced rates, zero rates or exemptions?

8 percent VAT rate:

Applies on sale of petroleum products.

Zero-rated supplies include:

  • export of goods and taxable services
  • supplies to diplomatic missions, donor agencies with bilateral or multilateral agreements, Kenya Red Cross Society, export processing zones
  • ship stores to international sea and air carriers
  • goods imported by passengers arriving from places outside Kenya (subject to certain conditions)
  • relief goods for emergency use
  • coffee and tea for export to auction centers
  • transportation of passengers by air carriers on international flights.

Exempt supplies include:

  • transfer of business as going concern 
  • financial and insurance services
  • education (including conference services for this purpose)
  • medical, veterinary, dental and nursing services
  • transportation of passengers (excluding international or hired or chartered conveyance) 
  • sale, leasing, hiring, letting of land or residential premises
  • accommodation and restaurant services by educational and medical institutions, and canteens operated by employers for employee benefits
  • unprocessed farming and animal products, live animals, fertilizers and farming pest control products
  • medicine
  • supplies (excluding motor vehicles) for use in construction of power generating plants (as approved by the government)
  • supplies (excluding motor vehicles) for use in geothermal, oil or mining prospecting or exploration (as approved).

What are the general and specific place of supply rules, if applicable?

A supply of goods is deemed to have been made in Kenya if it was:

  • delivered or made available in Kenya
  • installed or assembled in Kenya; and
  • delivered outside Kenya, but was in Kenya when transportation commenced.

A supply of services is deemed to be made in Kenya if the supplier’s place of business, from which services are supplied, is in Kenya.

If the supplier’s place of business is not in Kenya, services supplied shall be deemed to be made in Kenya if the recipient is not a registered person and:

  • services are physically performed in Kenya by a person who is in Kenya at the time of supply
  • services are directly related to immovable property in Kenya
  • services are radio or television broadcasting services received at an address in Kenya
  • services are electronic services delivered to a person in Kenya at the time of supply; or
  • the supply is a transfer or assignment of, or grant of a right to use, a copyright, patent, trademark, or similar right in Kenya.

VAT/GST registration

Who is required to register for VAT/GST?

Suppliers of taxable goods and services (including sole proprietorships, limited liability companies and corporations) whose turnover exceeds or is expected to exceed 5 million Kenyan shilling (KES) per annum should register for VAT.

Is voluntary VAT/GST registration possible for an overseas company?

No. The overseas company would have to register a branch in Kenya for it to obtain a VAT registration.

Does an overseas company need to appoint a fiscal representative?

Yes.

Is VAT/GST grouping* possible?

There is a provision for group registration in the legislation. However, no guidelines have been published yet.

VAT/GST compliance

How frequently are VAT/GST and other indirect tax returns submitted?

Monthly on the 20th day of the following month.

Can returns be filed and payments be made electronically?

Yes. Returns are required to be filed electronically through I-Tax.

What are the exchange rate rules?

Invoices can be issued in a currency other than KES but must be converted to KES for purposes of recording and accounting in the VAT returns and records. Daily and monthly average exchange rates may be obtained from the Central Bank of Kenya’s website. Other prominent exchange rate sites may also be used, but should be done consistently.

VAT/GST recovery

Can an overseas company recover VAT/GST and other indirect taxes if not registered for VAT/GST locally?

No.

Is it a prerequisite that output tax be charged before input tax can be claimed?

No. A taxpayer can still claim input VAT in the VAT return even though there is no output tax charged for the period.

Are there any exemptions with the right to recover or deduct input VAT?

Input VAT cannot be deducted on the following:

  • passenger cars and minibuses (including repairs, spare parts, lease and hire charges) and all other motor vehicles unless used for making taxable supplies
  • entertainment, restaurant and accommodation services unless if provided in ordinary course of business and not to employees, or if provided to an employee away from home for business.

Where VAT incurred relates to the making of both exempt and taxable supplies, input VAT should be apportioned.

For what period of time may input tax not previously claimed be claimed (i.e. prescription)?

6 months from the date of the invoice.

Where a VAT return reflects a refund due to the taxpayer, is the refund paid to the taxpayer or is the taxpayer required to utilize the refund as a credit against future payments?

The taxpayer is only entitled to a VAT refund where the refund is attributable to the supply of zero-rated supplies. All other refunds are to be set-off against future tax liability.

Invoices

Is a business required to issue tax invoices?

Yes.

Is it possible/mandatory to issue invoices electronically?

It is possible but not mandatory. All tax invoices need to have an Electronic Tax Register (ETR) receipt affixed or be signed with an Electronic Signature Device (ESD).

Is it possible to issue recipient-created tax invoices?

No. The revenue authority now reconciles sales declared by the seller to the input claimed by the buyer and these need to tally for the input to be deductible.

Audits

Do tax audits take place on a regular basis?

Audits are generally done every 3 years unless a risk of revenue leakage or fraud exists.

Are audits done electronically in your country/territory (e-audit)? If so, what system is in use?

The revenue authority is now prioritizing e-audits even though physical verification is carried out where inconsistencies arise from the e-audits.

What penalties can arise from non-compliance?

The following non-compliance penalties apply:

  • KES200,000 or up to 2 year’s imprisonment for failure to register when required
  • the higher of KES10,000 per month or 5 percent of tax due for late or non-submission of a return
  • KES100,000 or up to 6 months’ imprisonment for failure to comply with payment notice or to produce books or information and between KES10,000 and KES200,000 for failure to keep proper books
  • double the tax for falsifying information and fraudulent claims
  • KES400,000 or an imprisonment of 2 years for an individual or KES1 million for knowingly and without lawful authority gaining access to or attempting to gain access to any tax computerized system
  • KES800,000 or an imprisonment for a term not exceeding 3 years for falsifying any record or information stored in any tax computerized system or damaging the system
  • KES100,000 or an imprisonment of 3 years for a person who is required to produce any records, books of account, statements of assets and liabilities or other documents and fails to do so
  • general penalty of KES1 million or imprisonment for a term not exceeding 3 years or both
  • interest at 1 percent per month for late payment of tax.

Special indirect tax rules

Are there unique country/territory-specific indirect tax rules that differ from 'standard' indirect tax rules in other jurisdictions?

Hotel and restaurant services are subject to VAT at 16 percent effective from June 2006. Such services are also subject to a catering, training and tourism development levy (CTTDL) of 2 percent. Hence, the cumulative rate applicable to hotel and restaurant services is 18 percent.

Does a reverse charge mechanism apply?

Yes. Reverse VAT is payable on the portion of imported services that relates to exempt supplies. Persons who are registered for VAT and only make taxable supplies are exempted from reverse VAT. Where the taxpayer supplies both taxable and exempt supplies, the VAT is limited to the proportion of exempt to total sales.

Can VAT on reverse charges be claimed as input tax, to the extent that the expense on which the reverse charge VAT is accounted for, is used for taxable purposes?

No. Reverse VAT is payable on the portion of imported services that relates to exempt supplies and is not claimable.

Can non-residents appoint local agents in order to avoid reverse charge VAT by virtue of charging standard rate VAT and accounting for such VAT through the agent?

There is a requirement for appointment of local agents that is largely restricted to e-commerce. However, the appointments are not designed to replace reverse VAT but target persons selling to the final consumers where it would be difficult for the government to collect VAT.

Are there indirect tax incentives available (e.g. reduced tax, tax holidays)?

No.

Rulings

Is it possible to apply for formal or informal advance rulings from the tax authority?

It is possible to apply for formal rulings.

Are rulings and decisions issued by the tax authorities publically available?

Yes. Public rulings are published in the daily newspapers or on the tax authority’s website

Private rulings, specific to a taxpayer or industry are not published.

Other Indirect taxes

Are there other indirect taxes not commented on above?

Yes, other indirect taxes include:

  • import duty
  • excise duty
  • stamp duty.

For further information please contact

Clive Akora
Director
KPMG in Kenya
T: +254 20 2806000
E: cakora@kpmg.co.ke

Footnote

*By ‘grouping’ we mean: either a consolidation mechanism between taxpayers belonging to the same group (payment and refund are compensated but taxpayers remain distinct) or a fiscal unity for VAT/GST purposes (several taxpayers are regarded as a single taxpayer).

Disclaimer

All information contained in this document is summarized by KPMG in Kenya, a member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

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