ADMINISTRATION OF VALUE ADDED TAX

INTRODUCTION AND DEVELOPMENT OF VAT

VAT is a tax on expenditure that is collected by suppliers of goods and services and passed on to
the government. VAT is charged on the supply of goods and services in Kenya by a taxable
person in the cause of or in furtherance of any business carried on by that person and on the
importation of goods and services into Kenya. VAT was introduced in Kenya 1990 to replace
sales tax. The decision to replace sales tax with VAT was as a result of the perceived deficiencies
in the sales tax system which includes:

 The sales tax system was a single stage system- sales tax was levied only once at the
manufacture level. However, in a country where tax evasion is widespread, a single stage tax
system will result in a higher loss of revenue than would normally be the case if the system was
multi stage.

 Where the inputs for manufacturing were subject to sales tax, the imposition of sales tax on
the finished product will result in the imposition of tax on another tax i.e. cascading effect.

 The sales tax system had a limited scope - sales tax was levied only on certain specific
manufactured Goods. Services were not within the scope of tax. Therefore, sales tax had a
narrow tax base as compared to VAT, with the result that the revenue yield was comparatively
low.

 VAT is an indirect tax, It is essentially a tax on the domestic expenditure or consumption.

Under VAT, it the end user or consumer that ultimately bears the tax burden.

 VAT is charged on each transaction in the production and distribution chain.

QUESTION:

A manufacturer purchased raw materials at sh. 1 m on which VAT was charged at 16%. At each
stage of the production and distribution chain conversion cost of 25% was incurred and a markup
of 30% included to determine the selling price. Calculate the total VAT collected for the
government.

Solution
REGISTRATION AND DE-REGISTRATION OF TAXABLE PERSONS
REGISTRATION FOR VAT

 Registration, de-registration and changes affecting registration are dealt with in the
sixth schedule of the VAT Act.

 Compulsory registration applies to any person who in the course of his business has
supplied taxable goods or taxable services or expects to supply taxable goods or taxable
services, or both, the value of which is Sh. 5,000,000 or more in a period of twelve months.

 Any person who meets the above conditions is a taxable person and should, within thirty
days of becoming a taxable person, apply for registration.

 Voluntary registration is permissible under the law, but is granted at the discretion of
the commissioner.

 Where a person qualifies for registration, a registration certificate shall be issued within
ten working days after receipt of the application by the commissioner.

 Where an application for registration is made within 30 days of becoming a taxable

person, the effective date for registration is deemed to be the 30th day from the date the
person became a taxable person. However, the commissioner has the discretion to vary the
effective date, and in practice, the date of receipt of the certificate applies.

 Every registered person is required to display the registration certificate in a clearly

visible place in his business premises. Where a person has more than one place of business,
certified copies (by the commissioner) must be displayed in each of those places.

DEREGISTRATION

 If the value of taxable turnover does not exceed five million shillings in any period of
twelve months, a registered person may apply for de-registration and will be subject to
turnover tax under the Income Tax Act, upon notifying the Commissioner.

 A person applying for de-registration should notify the Commissioner of the value of his
supplies in the relevant periods and the description and value of taxable materials and
other goods in stock.
 If the commissioner is satisfied that the trader should be de-registered, he will do so from
the date when that person pays the tax due in respect of goods and materials on which tax
has not been paid or input tax has been claimed.

 Where a person ceases to make taxable supplies, he must notify the commissioner
immediately, of the date of cessation and submit a return showing details of taxable assets,
materials and other goods in stock and their value and pay any tax due on such assets and
goods within thirty days from the date he ceased to make taxable supplies.

CLASSIFICATION OF TAXABLE GOODS AND SERVICES

Supplies may be classified into three types for VAT purposes:

- Standard rated supplies.

- Zero rated supplies.

- Exempt supplies.

STANDARD RATED SUPPLIES

These are supplies that are subject to VAT at the standard rate of 16% or incase of electricity
12%. The input tax on standard rated supplies is deductible against the output tax. Suppliers
making standard rated supplies must register for VAT and the value of such supplies is taken into
account in considering whether a person is to register for VAT or not.

ZERO RATED SUPPLIES

It means that tax is charged at zero (0) % on the supply but the supply is treated as a taxable
supply in every other respect. The value of zero rated supplies is taken into account in
determining whether a supplier is a taxable person who is required to register for VAT. A
registered person making zero rated supplies will not charge VAT on his supplies but can obtain
a refund of the input tax paid on his purchases.

EXEMPT SUPPLIES

VAT is not chargeable on exempt supplies the value of exempt supplies is disregarded in
determining the minimum turnover required for registration. A person who makes only exempt
supplies cannot obtain any refund of the input tax suffered on their purchases.
Exempt services

1. Financial services excluding:  Financial and management advisory services  Safe custody
services  Trustee services 2. Insurance and re-insurance services 3. Education and training
services offered to students 4. Medical, dental, veterinary and nursing services 5. Sanitary and
pest control services rendered to domestic households 6. Agriculture, animal husbandry and
horticultural services 7. Social welfare services provided by charitable organisation 8. Burial and
cremation services (up to time of disposal) 9. Transportation of passengers by any means of
conveyance except where the means of conveyancing is hired/leased. 10. Postal services

SUPPLY OF SERVICES

The following shall be designated services and shall be taxed at whatever threshold; a.
Accounting services including any type of audit, book keeping or similar services b. The
provision of reports, advice, information or similar technical service in the following areas: 
Management, financial and related consultancy  Recruitment, staffing and training  Market
research  Public relations  Advertising  Actuarial services  Material testing services,
excluding medical, dental or agricultural testing services. c. Computer services of any
description including the provision of bureau facilities, system analysis and design, software
development and training but excludes training offered to students in the furtherance of
education and which is not part of user training or other business training. d. Legal and
arbitration services including any services supplied in connection therewith e. Services supplied
by architects, drawings and interior designers f. Services supplied by land and building
surveyors, quantity surveyors, insurance assessors, fire and marine surveyors, loss adjusters or
similar services. g. Services supplied by consulting engineers h. Services supplied by
auctioneers, estate agents and valuers i. Services supplied by agents excluding insurance agents

j. Services supplied by contractors k. Services supplied by clearing and forwarding agent l.

Services supplied by brokers, excluding services supplied by insurance brokers, stock exchange
brokers and tea and coffee brokers dealing exclusively in tea and coffee for export m. Services
supplied by security and investigation organisations including rental of security equipment and
installation.

ACCOUNTING FOR VAT

VAT is charged where:

 The supply of goods or services and on the importation of goods or services into Kenya; 
The supply is a taxable supply;

 The supply is made by a taxable person;

 The supply is made or provided in Kenya; and

 The supply is made or provided in the course of the furtherance of a business carried on by
the taxable person.

The expression “supply” includes:  The sale, supply or delivery of taxable goods to another
person;  The sale or provision of taxable services to another person;  The appropriation of
taxable goods or services by a registered person for his own use outside the business;  The
making of a gift of any taxable goods or taxable services;  The letting of taxable goods on hire,
leasing or other transfers;  The provision of taxable services by a contractor to himself in
constructing a building and related civil engineering works for his own use, sale or renting to
other persons;

 The appropriation of taxable goods by a registered person for use in the business where, if
supplied by another person, the tax charged on the supply would have been excluded from the
deduction of input tax; and  Any other disposal of taxable goods or provision of taxable
service.

TAXABLE VALUE

The charge for VAT is determined by the value attributable to the supplier of goods and services.
The general rule for determining the value of a supply is as follows:

 Where a supplier and a buyer are independent of each other and dealing at arm’s length, the
value for tax is the price for which the supply is provided;

 Where the supplier and the buyer are not independent of each other, the taxable value of the
supply is the price at which the supply would have been provided in the ordinary course of
business by a supplier who is independent of the buyer; and
 If in the above case the price cannot be determined, the commissioner is empowered to fix
the price at the open market selling price.

CHARGE TO TAX, DEDUCTIONS OF INPUT TAX, APPORTIONMENT METHOD OF

INPUT TAX

The input tax which may be deductible by a registered person is maybe:

- The whole of the input tax incase all supplies are taxable.

- Such part of the tax as can be attributed to taxable supplies where only a proportion of the
supplies are taxable.

- Where a person makes both exempt and taxable supplies, he may only claim the input tax
attributable to taxable supplies. However, he can claim the whole of the input tax if input tax
related to exempt supplies is always less than 5% of the total input tax.

Illustration

The management of Masaa Ltd a registered supplier of vatable goods presented the following
information relating to the companies transactions for the month of October 2011.
Sh.

Sales at standard rate 36,000,000

Sales at zero-rate 14,000,000

Export sales 4,000,000

Exempt sales 6,000,000

Purchase at standard rate 30,000,000

Purchase at zero rate 12,000,000

Salaries and wages 6,000,000

Purchase of ETR 120,000

Required:

Determine the VAT payable or refundable by the company for the month of October 2011
Solution

VAT DUE FOR PAYMENT OR CREDIT VAT ACCOUNT

The VAT account is posted with monthly totals. The total input tax is debited to the account and
the total output tax is credited. If the debit side is greater than credit side (debit balance) the
balance is VAT refund which is carried forward to be offset against the output tax of the
following month. However where the credit side is greater than the debit side the balance is the
VAT payable to the commissioner by the 20th day of the following month.
The VAT account is completed as follows:

CLASS GROUP DISCUSSIONS

Solution