VALUE ADDED TAX (VAT)

VAT is tax on spending which is collected by businesses and passed on to the Government. Value
Added Tax is charged on the supply of goods or services in Kenya and on the importation of
goods into Kenya.
VAT rates in Kenya
There are two tax rates that apply across Kenya:
 16% – the standard rate for taxable goods and services, as well as imports
 0% – the rate applied to exports, international passenger transport, and zero-rated supplies (such
as supplies sent to EPZs, diplomats, and governments)
Note: There is a 3% turnover tax on businesses below the VAT registration threshold, between
sh. 100,000 and 500,000.

Important terms in VAT

i. Tax invoice: Is a document which gives the description of goods supplied, their VAT
rate, amount of VAT and total value of goods supplied by a supplier
S T U D Y

ii. Remission: This refers to the waiver by the Commissioner of Domestic Taxes of any tax
payable by a tax payer i.e. the tax payers tax is written off.
iii. Turnover Tax: Turnover tax is a tax on consumer expenditure. The applicable rate is
3% of gross sales per annum and it is a final tax. It is applicable to any person whose
annual turnover from business is more than Sh. 500,000 per annum and does not exceed
Sh 5 million.

iv. Taxable Supply: A taxable supply is a supply of taxable goods or services made or
provided in Kenya. The Act defines taxable goods as electricity and manufactured goods,
other than those specified in the second schedule of the Act. The second schedule

T E X T
specifies the exempt supplies. The Act also defines taxable services as any service not
specified in the third schedule
v. Exempt supply is defined as the supply of goods specified in the second schedule or
supply of services specified in the third schedule. Therefore taxable supply briefly can be

EUXDT Y
defined as the supply of any goods or service unless the supply is an exempt supply.
vi. Value Added: It is the increase in worth of a supply when it changes hands in the line of
manufacture and distribution. S T U SDTTY
vii. Output Tax: This is the VAT charged by a registered person when he makes a supply of
taxable supplies in the course of his business.
viii. Input Tax: This is the VAT charged on a taxable person when he acquires taxable
supplies for use in the furtherance of his business.
ix. Taxable person: This is a person who is liable to apply for registration under the VAT
Act (check registration for VAT).
x. VAT payable/refundable: It is the difference between input and output tax. If output tax
is more than the input tax the difference is the VAT payable. If input tax is higher than
output tax the difference is the VAT refundable.
xi. Tax period: It means one calendar month. VAT is accounted for on a monthly basis.
 xii. Taxable goods/ services: Goods/ services on which VAT is chargeable.
xiii. Exempt goods/ services: Goods/ services on which no VAT is chargeable.
xiv. Zero Rated Goods/services: Goods/ services on which VAT is chargeable at 0%
T E X T

Commencement of VAT
VAT is chargeable on the supply of goods and services or on the importation of goods taking
place on or after January. 1. 1990. It replaced sales tax and this decision to replace sales tax with
VAT was largely due to the perceived deficiencies in the sales tax system.
Differences between sales tax and VAT
Sales tax VAT
1. it was charged on the cost price 1. it is charged on the selling price
2. it was charged on goods only 2. it is charged on goods and services
3. it was charged at one point only 3. it is charged on several point

Registration of VAT

There are several registration methods;

a. Compulsory registration; this occurs when a trader makes or anticipates to make a

supply of 5 million and above in a given year of income and who supply vatable or
taxable goods. Supply below sh. 5 million but above sh. 500,000 are subjected to
turnover tax which was reintroduced in 2008. The trader should register within a period
of 30days upon becoming a taxable person.

b. Voluntary registration; this is permissible by the law where a trader who is not qualified
for registration enjoy the benefits of a registered person. It is normally subject to
approval by the commissioner.

c. Temporary registration; this occurs where an individual who was not registered apply
for registration temporarily e.g. Where a trader is to carry on business for a period less
than 12 months

d. Group registration; this occurs when a company controls another company. The holding
company may request the commissioner to register all the companies under one person.
In this case each company will be liable to VAT charges on group supplies. The
commissioner however has the power to revoke such a group registration if;

1. There is loss of revenue to the government.

2. If one company ceases to supply taxable goods.

3. If the holding company ceases to control substantially one of the subsidiary.

Rights of a registered person
 1. Right to claim a refund where necessary.
2. Right to get any VAT information.
3. Right to have access to the commissioner if the trader has a genuine claim.
4. Right to require the VAT officers identify themselves before gaining access to the
business.
5. Right to offset input tax against output tax.
6. Right to claim a bad debt written off relief when it occurs.
7. Right to be treated fairly in the VAT tribunal.
Obligations of a registered person

1. A duty to charge VAT on vatable supplies.

2. A duty to file return on due dates.
3. A duty to display VAT certificate at a place of business.
4. A duty to keep proper books of account.
5. A duty to install an electronic tax register (ETR) system.
6. A duty to disclose all the relevant information that may be required in the VAT audit.
7. A duty to pay VAT money to the commissioner by 20th of the month following the month
of supply. Where such a date falls on a weekend VAT should be paid before the weekend
arrives.
When is VAT payable?

It is important to note that tax is due or payable (earlier of) when;

1. Goods or services are supplied to the purchaser.

2. An invoice is issued in respect to the supply.
3. Payment is received for all or part of the supply.
4. A certificate is issued by an architect, surveyor or any other person acting as a consultant
or in supervisory capacity in respect to the service.

How to file for VAT

VAT returns are submitted monthly via iTax on or before the 20th of the following month.
Persons with no VAT to declare are required to submit a NIL return.

How to pay for VAT

After filing the VAT return online via iTax, you are required to generate an E-slip which is used
to physically pay the tax at the KRA appointed Banks.
You may however authorize your bank to pay the tax through a direct credit transfer to the
Commissioners account at the Central Bank of Kenya.

Definition of supply
Supply- This means transacting in taxable goods or services. Supply includes the following:
a. The sale or delivery of taxable goods to another person
 b. The sale or provision of taxable services to another person.
c. The appropriation by a registered person of taxable goods or services for his
own use outside the business.
d. The making of a gift of any taxable goods or services
e. Letting of taxable goods on hire, leasing or other transfers
f. 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.
g. The receipt of a sum of money by a registered person for loss of taxable
goods or services.
h. Any other disposal of taxable goods or provision of taxable services.
Types of supply
1. The standard rate supply
These are supplies which are taxable and are charged a VAT at a rate of 16%.
2. Zero-rated Supply
Where a taxable person supplies goods or services and the supply is zero-rated there
are two significant consequences:
(a) No tax is chargeable on the supply; but
(b) The supply will in all other respects be treated as a taxable supply.
Accordingly, the rate at which tax is treated as charged on the supply will be nil, in contrast to
the standard rate of 16%. The value of zero-rated supplies will be taken into the computation to
determine whether the supplier is a taxable person who is required to be registered.
Zero-rating is the most favorable treatment for any transaction in the VAT system. Registered
persons making zero-rated supplies are able to recover their input tax and usually find
themselves in a refund position.
The government earns no revenue from zero-rated supplies. Consequently, zero-rating is granted
sparingly to essential goods and services. Zero-rated supplies include:

(a) Goods and services exported from Kenya;

(b) Seeds, fertilizers, pesticides and hoes;
(c) Educational materials, etc.
(d) Maize flour
(e) Paraffin
3. Exempt supply
These are non-taxable goods and services. No VAT is chargeable on them. A trader who supplies
exempt commodities only does not need to register for VAT. Any input tax that is paid on
exempt supply is not deductible.
Items whose input tax is not deductible
According to VAT order 2002, items whose input taxes are not deductible are stipulated and
their input tax shall not be deducted against output tax unless such items are used as stock in
trade. These goods include;
 Unprocessed agricultural products and agricultural services
 Medical supplies (like physiotherapy accessories, treadmills, and ventilators)
 Financial services and insurance
Suppliers of imported digital services will also be exempt from VAT, as they are excluded from
meeting the sh. 5 million VAT registration threshold.
VAT Records
1. Tax invoice
Whenever a registered person makes a supply on credit terms, he must issue a tax invoice
immediately or at the time when payment is being made. In respect of a cash sale, VAT tax
invoice is issued immediately. A tax invoice can only be issued by a registered person.
Contents of a tax invoice
 The name, address and the PIN of the supplier
 The serial number of the invoice
 The date of the invoice
 The date of the supply
 The name, address and PIN of the person to whom supply is made
 The description of the goods
 The nature of the supply i.e. whether standard rated or zero rated
 The rate of VAT
 The amount of VAT
 The value of the supply
Example of a tax invoice
Invoice No. 22 Date 20.1.2007
From: Accessories (Kenya) ltd,
P.O. Box 90,000 VAT Reg No.10250
Kenyatta Avenue, Nairobi. Date of supply 20.1.2007
To: Smart Suits Ltd,
P.O. Box 90,001, VAT Reg. No. 10597
Moa Avenue, Nairobi.

Quantity Description and size Amount Exclusive VAT VAT rate VAT net

10 pairs leather gloves @ Sh 200 2,000 16% 320

50 pairs Men suits @ Sh 2,000 100,000 16% 16,000

T E X T

50 pairs Cuff links plated @ Sh 100 5,000 16% 800

Totals 107,000
—
S T U D Y

Terms VAT 17,120

Totals — 17,120
Cash Total 124,120
—
2. Credit note
Credit note may be issued when goods are returned for valid reasons or there is an overcharge of
VAT. They may be issued or received. The recipient of the credit note shall reduce the input tax
for the month in which the credit note is received.
Where a credit note has been issued, adjustments are made in the month in which a credit note is
issued.

3. Debit note
A debit note is mostly used to correct an underrcharge of the tax. They may be received or
issued. The recipient of the debit note may claim credit for the further tax or in the following
month.
Notes: both credit and debit notes shall have the following information;
1. Serial number
2. The name, address and the PIN of the person(s) to whom they are issued
3. Sufficient information regarding the transaction to which they relate

4. Value Added Tax (VAT) returns

Registered persons are required to submit a VAT return (form VAT 3) by 20th day or not later
than the last working day of the month following the month covered by the return if the 20 th day
is a weekend or a public holiday. The return should show separately for each rate of tax:
a) Particulars of the total value of supplies.
b) The rate of tax to which the supplies are liable.
c) The amount of tax payable.
d) The total value of taxable supplies received.
e) The rate at which tax was paid.
f) The amount of tax paid in respect of which deductible input tax is claimed.

If no transactions are carried in any month a NIL return is submitted. The taxpayer should keep
a copy of returns made for record purposes.

Vat Remittance, Rebate and Refund.10 REMISSION, BATE

i. Remission of vat
This refers to the waiver by the Commissioner of Domestic Taxes of any tax payable by a tax
payer i.e. the tax payers tax is written off. The commissioner can waive wholly or partly any tax
payable if he is satisfied that it is in the public interest to do so. Where a remission is granted
under a certain condition, the tax shall become payable in the event of breach of the condition.
However, such remission is not applicable where the person:
(a) Has been assessed by the VAT department.
(b) Is under audit or investigation by the VAT department.
ii. Refund.
It is the repaying (paying back) by the commissioner of tax that the taxpayer had paid to the
commissioner.
Refund of tax may occur in the following situations:
1. Where goods have been manufactured in Kenya or imported into Kenya and tax paid thereon,
but before being used in Kenya, such goods are exported.
2. Tax paid in Error:
It is important to note that if the commissioner refunds any tax in error or grants a remission in
error, then the taxpayer is required to pay such tax on demand by the commissioner. If a
taxpayer pays any tax in error (e.g. due to miscalculation) he is entitled to a refund.
3. Refund of tax on Bad debts:
Where a registered person has supplied goods or services and has accounted for the tax on that
supply but has not received any payment from the buyer, he may after a period of 3 years from
the date of such supply or where the buyer has become legally insolvent, apply to the
commissioner for a refund of tax or remission of the tax.
4. A refund is also given if in the opinion of the Minister for Finance, it is in the public
interest to do so eg. in times of drought, floods or other calamities.
5. Where input tax exceeds the amount of output tax.

NB
If for any tax period, a person has over-paid tax, i.e. the input tax claimed exceeds the output tax
for the period; the excess amount is carried forward to be set-off against output tax for the
following period. However, if this position is a regular feature of the business then the
Commissioner shall refund the excess amount.
No tax is refundable if the registered person is not up to date in the submission of VAT returns.
The claim for refund must be made on the appropriate form within a period of twelve months.

Recovery of VAT
The commissioner for VAT has a right to recover any unpaid VAT in the following ways;
1. Through the withholding VAT agents. These are normally traders who are registered
and charge VAT on all vatable supplies and withhold such VAT and remit. It directly to
the tax man. However, we have other withholding VAT agencies such as financial
institutions, government departments such as ministries, other commissioners e.g.
commissioner of customs and excise.
2. Collection of tax in distress. The commissioner is empowered to appoint authorized
officers and empower them to stop or seize the goods of a trader whose VAT is unpaid.
3. Use of a security or collateral. Where the tax payer had attached security or collateral
for compliance of payment of VAT and he is in default, the security can be sold to
recover the unpaid tax. Any excess on sale of securities should be surrendered to tax
payer.
4. Tax amnesty. This is where the minister in charge forgives a trader on any outstanding
tax.
Offences, Fines and Penalty
1. Any person who makes false statements, false documents, false returns, a non-
registered person, fraudulent evasion of tax:
Fine not exceeding Sh.400, 000 or double the tax evaded, whichever is the greater and/or
imprisonment for a term not exceeding three years.
 Forfeiture of any goods which have passed with the commission of the offence.
2. Failure to submit a return
Penalty of Shs.10, 000 or 5% of VAT due whichever is higher.
3. Failure to keep proper records
Penalty of between Shs.10, 000 and Shs.200, 000
4. Failure to supply a tax invoice
Penalty of between Sh. 10,000 and Sh. 200,000. Any goods connected with the offence are
liable to forfeiture.
5. Later registration
Penalty of up to Sh.20, 000
6. Failure to display registration certificate
Penalty of up to Sh.20, 000 and a fine of up to Shs.200, 000 and/or imprisonment for up to
two years.
7. Late payment of tax – 5% of the due tax amount and an interest of 1% per month should
be paid on the unpaid tax until you pay the whole VAT amount due.
The Value Added Tax (VAT) account
The VAT account is posted with month totals. Total input tax for the month is debited to the
account and the total output tax credited. A credit balance would represent the tax payable to the
commissioner while a debit balance will represent excess input tax which is carried forward and
offset against output tax of the following month. In order to obtain monthly totals, the sales
ledger control account may carry an extra column to record VAT on credit sales, the purchase
ledger control account may also have a column for VAT on purchases. The cashbook may be
analyzed to show VAT on cash transactions.
VAT A/C
Input VAT Output VAT XX
VAT claimable bal b/d XX
Purchases (std rate) XX Opening stock XX
Purchases (zero rated) XX Sales (std rate) XX
Expenses XX Sales (zero rate) XX
Debit note received XX Debit note issued XX
Credit note issued XX Credit note received XX
Bad debt written off XX Bad debt recovered XX
Return inwards XX Return Outwards XX
VAT payable XX VAT claimable XX
XXX XXX

Example
The management of Maendeleo Ltd., a registered supplier of vatable goods presented the
following information relating to the company’s transactions for the six months ended 30 June
2024.
 Purchases Sales
Sh. Sh.
January 1,500,000 2,200,000
February 1,800,000 2,700,000
March 1,700,000 2,000,000
April 1,500,000 900,000
May 400,000 600,000
June 2,000,000 2,600,000
The amounts stated above were inclusive of VAT at a rate of 16%.
Additional information:
1. All purchases were made on cash basis while all sales were on credit basis. The cash due on
credit sales was received in the month following the month of sale.
2. Ten per cent of the purchases made by the company in the month of April were returned to the
suppliers in the same month.
3. Included in the sales for the month of May was Sh.200, 000 for which the debtor defaulted and
was subsequently declared bankrupt on 30 June 2024.
Required
Determine the VAT payable or refundable for each of the six months from January to June 2024.

ZU/WI/25/EXM/6
UNIVERSITY EXAMINATION 2023/2024
ORDINARY EXAMINATION FOR BACHELOR OF COMMERCE/ BACHELOR OF
ACCOUNTING AND FINANCE/ BACHELOR OF BUSINESS ADMINISTRATION AND
MANAGEMENT
BAC 321: PRINCIPLES OF TAXATION
DATE: APRIL 2024 TIME: 2 HOURS

INSTRUCTIONS: ANSWER QUESTION ONE (COMPULSORY) AND ANY TWO QUESTIONS

Prescribed benefit rates of motor vehicles provided by the employer

Monthly rates Annual rates
(sh.) (sh.)
(i) Saloon, Hatch backs and estates
Up to 1200cc 3,600 43,200
1201 1500cc 4,200 50,400
1501 1750cc 5,800 69,600
 1751 2000cc 7,200 86,400
2001 3000cc 8,600 103,200
Over 3000cc 14,400 172,800
(ii) Pick ups, Panel van (unconverted)
Up to 1750cc 3,600 43,200
Over 1750cc 4,200 50,400
(iii) Land Rovers/Cruisers 7,200 86,400

Commissioner’s Prescribed benefit rates for services

(i) Electricity (communal or from a generator) 1,500 18,000
(ii) Water (communal or from a borehole) 500 6,000
Agricultural employees (reduced rates)
(i) Water 200 2,400
(ii) Electricity 900 10,800

QUESTION ONE (30 MARKS)

a) The government’s aim is to raise more revenue so as to improve the social welfare of the members of
the public. This revenue mostly is raised from taxes but other than tax there are other sources. Outline
five sources other than tax.
(5mks)
b) Delight Ltd. provided the following draft income statement for the year ended December 31st 2023.
Sh. Sh.
Gross sales 5,800,000
Discount received 120,000
Profit from sale of furniture 86,000
Provision of general bad debt 14,000
Foreign exchange gain 126,000
Post office savings 10,000
6,156,000
Less expenses
Cost of sales 3,840,000
Rent and rates 348,600
Preliminary expenses 10,000
Subscriptions 26,800
Depreciation 184,000
Legal fees 380,000
Redundancy payments 484,000
Purchase of computers 180,000
Donations to political party 140,000
Professional fee 54,800
Directors fees and expenses 15,000
Interest on overdue tax 5,000 (5,667,800)
Net profit 488,200
Additional information:
1) Legal fees include:
Sh.
Stamp duty 72,000
Defending director against corrupt charges 28,000
Audit fees 60,000
Income tax appeal to a local committee 75,000
2) Professional fees include Sh. 20,800 paid to a tax consultant.
3) Subscription includes Sh. 18,400 paid to a research organization.
4) Stock as at 31st December 2023 was stated at Shs.575,000 which included an overvaluation of 15%
5) Rent and rates comprises:
Sh.
City council rates 48,200
Conveyance fees for a piece of land 140,000
Insurance of motor vehicle 52,000
Accrued rent for year 2022 108,000
348,200
6) Included under the cost of sale is the input tax of Sh. 142,800 and cost of computer software of Sh.
60,000.
Required.
i. A statement of adjusted taxable profit or loss for Delight Ltd. for the year ended December 2023.
(10mks)
ii. Tax payable (if any) by Delight Ltd for the year ended 31st December 2023. (2mks)
c) One of the non-taxable benefits against employment income is passage. Discuss the meaning of
passage and state four conditions that must be fulfilled for it to be considered as a nontaxable benefit.
(6mks)
d) Christine has just received her first employment in ABC Ltd and is really concerned on how her
income within that year of income will be taxed. She has heard from a friend about resident status in
relation to tax and has approached you to explain to her the meaning of residence for tax purposes and
discuss three implications of her being a resident or not within a given year of income.
(7mks)

QUESTION TWO (20 MARKS)

a) Explain the differentiating characteristics of the following terms as used in taxation.
i. Impact and incidence of tax (2mks)
ii. Forward and backward shifting of tax (2mks)
iii. Zero rated and exempt supplies (2mks)
iv. Taxable and non-taxable income (2mks)
b) The following details were extracted from the books of ABC limited for the month of December 2023.
The transactions are inclusive of VAT at the rate of 16% where appropriate.
 December 1: opening stock; 45 units of merchandise valued at 67,500
 December 2: purchased 300 units at 1,800 per unit
 December 3: sold 60 units at 2,400 per unit
 December 5: sold 80 units at 2,500 per unit
 December 8: Purchased 180 units at 2,000 per unit
 December 10: return 40 units which had been purchased on 2nd December at 2,000 per unit
 December 14: sold 120 units at 2,400 per unit
 December 19: sold 80 units at 2,200 per unit
 December 27: exported 60 units at 3,000 per unit
 December 30: debtors valued at sh. 36,000 were declared bad.
Required: VAT account for the month of December 2023 showing the VAT payable or refundable.
(7mks)
c) Ken has just registered his business for Value Added Tax (VAT) purposes. He really understands that
noncompliance with the law might negatively affect his operations and therefore he has approached you
to outline for him five offences that he is likely to commit as a person registered for VAT that will subject
his business to fines and penalties.
(5mks)
QUESTION THREE (20 MARKS)
a) Outline four roles of taxation in economic development. (4mks)
b) Leo, Kesho and Kutwa trade in electrical goods and as partners in Leo Unincorporated. They share
profits and losses equally. The following details in the draft accounts regarding their profit and loss status
as at 31 December 2023 have been provided:

Debits Credits
Sh. Sh.
Office expenses 408,000 Gross profit 2,600,000
General expenses 188,000 Interest earned 240,000
Salaries and wages 560,000 Discounts received 160,000
Show room expenses 234,000 Other receipts 300,000
Rents, rates and taxes 300,000 Rent income 264,000
Printing and stationery 128,000 Gain on sale of motor vehicle. 200,000
Instalment tax paid 90,000
Advertising 146,000
Legal charges 164,000
Interest on capital 420,000
Depreciation 184,000
Bad debts 136,000
Commission to partners 160,000
Donation for poverty 200,000
Property taxes 24,000
Electricity expenses 92,000
Net Profit 240,000
The partners provided additional information as follows:
1. Closing stock had been understated by Sh.30,000 as at 31 December 2022.
2. Leo was paid Sh.100,000 as salary (included in salaries and wages) and PAYE Sh.31,000 was
paid on it.
3. The firm was fined Sh.30,000 for breach of regulations. This is included in legal charges.
4. Interest on capital was Sh.160,000 to Leo, Sh.120,000 to Kesho and sh.140,000 to Kutwa.
5. Commission to partners include sh.90,000 to Leo and the balance to Kutwa.
6. Capital allowances had been agreed at sh.180,000 with the tax authorities.
Required:
i. Compute the adjusted income (loss) from the partnership business. (9mks)
ii. Show allocation of profit/loss among partners. (4mks)
iii. Tax liability of each partner if any (3mks)

QUESTION FOUR (20 MARKS)

a) Identify and discuss three differentiating characteristics between sales tax and VAT. (6mks)
b) Kimani is a sales manager with ABC ltd. The following information relates to his income for the year
ended 31st December 2023.
1. Basic salary shs.720,000 p.a (P.A.Y.E sh. 54,000)
2. He received the following benefits from his employer;
 A fully furnished house (cost of furniture shs.300,000)
 He drives a car (1900 CC) provided by his employer. On average, three quarters of the use is for
official purposes. The vehicle had cost the employer shs.1,600,000 on January 2017.
 His tuition fees at a local college amounting to shs.360,000 per annum is paid for by his
 employer.
 A gardener and a watchman who each paid shs.17,500 per month by the employer.
 A personal monthly entertainment allowance of shs.10,000.
 An annual house allowance calculated as 5% of his annual pay.
 The company had a medical scheme for its managers. He was paid for sh. 380,000 during the year
in respect to medical bills.
 During the year he was voted as the best employee and the company rewarded him with a cash of
sh. 60,000.
3. He contributes shs.20,000 per month to a registered provident fund. The employer contributes an equal
amount to the same fund.
4. He owns five (5) units of houses for rent at shs.15,000 each per month.
5. Kimani also has a business of selling shoes. He has insured his stock as well as his household items.
During the year, shoes worth sh. 200,000 were stolen and his house also broken into and household items
worth sh. 85,000 were stolen. He received compensation for loss in both cases on September 2023.
6. He obtained a mortgage loan for the purpose of constructing his residential house from the National
Savings Bank. The loan amount was sh. 4,000,000 with a monthly repayment of sh. 232,000. During the
year the total interest paid on the loan was sh. 144,000.
7. He received dividend from his investment in Jubilee Cooperative Society of sh. 60,000(net).
Required;
i. Determine the taxable income of Kimani for the year ended 31 December 2023. (8marks)
ii. Compute the tax payable, if any, from the income computed in (i) above (3marks)
c) One of the specified taxable sources of income according to the Income Tax Act is deemed income.
Give three examples of these incomes. (3mks)