Value Added Taxes;How VAT operates

The government collects revenue from citizens through taxation, in Kenya the Kenya Revenue Authority (KRA) is the body that collects taxes on behalf of the government. From a business one of the significant revenue to the government is through Value Added Tax.  In this article, we are going to discuss more about what is VAT, how VAT works, and the registration and deregistration, deadline for filing VAT and penalties for late filing.

VAT is a consumption tax obligation that’s is imposed whenever a value is added on goods and services at each stage of the supply chain from production to consumption. VAT is levied on the use of taxable products and services supplied or imported to Kenya. The tax is collected by registered persons (those who have registered for the VAT obligation) at designated points in the supply chain and remitted to KRA. For example in a supply chain for good such as floor, VAT is collected by the Manufacturer, the Wholesaler and finally the Retailer.

The tax rate charged depends on the category the goods and services fall into according to the VAT rules. These rates are:

VAT Tax rates

1. The General VAT rate of 16%.
2. Other Rated Goods at 8% (example currently  is Fuel)
3. Exempt goods; these are the goods which are not VAT taxable.
4. Exempt Services; these are non-taxable services.
5. Zero rated supplies; these are supplies that attract VAT at 0%.

How VAT works

VAT is charged at every stage along the supply line by registered persons, and the final consumer usually bears it. A VAT account is traditionally maintained. It’s a ledger which records VAT on goods and services charged to customers (output tax), and on products and services billed to a business supplies (input tax). The difference between output tax and input tax is payable to KRA, in this case where the output tax is more than the input tax. Where input tax is higher than the output tax, the difference should be carried forward to the next period (tax credit). KRA may refund the credit in cases where the commissioner is satisfied the excess arises from making zero-rated supplies.

  Registration for VAT Obligation

Any individual can register for VAT obligation whether a Sole Proprietor, Partnership or a Limited Company. We offer this service

To qualify for certification one must attain or expect to achieve taxable turnover (Sales) value of Ksh 5 Million in a year; however, the VAT Act provides for voluntary registration where a taxpayer wished to register even if they can’t reach a turnover of 5 million in a year.

Upon successful registration one is required:

• Display the registration certificate in a conspicuous place at the business premises, failure to which leads to a penalty of Ksh20,000.
• File monthly VAT returns before 20^th of every previous month failure to which attracts a penalty of Ksh 10,000.

Why should a business register for VAT obligation?

Here are some of the reasons why a business should register for VAT. The advantages of VAT self-registration in Kenya:

1. Claiming VAT on input tax

Where a business has registered for VAT it will be able to claim and balance its Input tax on VAT.

1. Claim for refund.

The business can claim for a refund where the input VAT tax is more than the output tax.

1. Good Business profile

A business that has a VAT obligation boost its profile since its compliant to the laws.

1. Trade Deals

A business that’s looking forward to conducting business with the government and public institutions through tendering is required to have registered for VAT.

1. To avoid penalties

Failure to register for VAT where the business reaches the threshold for registration attract penalty a forceful registration which can also be backdated where the KRA commissioner for Domestic taxes has sufficient evidence.

Removal of VAT Obligation.

Where a business that has a VAT tax obligation and would like it removed it can write the commissioner a letter and fill a form for removal of VAT tax obligation with the reasons for departure and also attach documentary evidence to support the reasons.

At Anziano Consultants we offer services for VAT in registration, filling and even deregistration. Contact us for the services.