Understanding Input and Output VAT in Kenya: A Guide for Taxpayers

As a business owner or taxpayer in Kenya, understanding the dynamics of Value Added Tax (VAT) is crucial for compliance and financial planning. This article delves into key concepts of Kenya’s VAT system, including input VAT, output VAT, and the critical importance of proper record-keeping and documentation.

What is VAT in Kenya?

Value Added Tax (VAT) is a consumption tax levied on the supply of taxable goods and services in Kenya. It is an important source of revenue for the Kenyan government and is governed by the Value Added Tax Act, 2013.

Input VAT Explained

Input VAT is the tax that a registered business pays on the purchase of goods and services for business use. This includes VAT paid on local purchases from other registered businesses and on imports.

Key points about input VAT in Kenya:

1. It is deductible against output VAT, but only for purchases related to making taxable supplies.
2. Specific documentation is required for claiming input VAT deductions.
3. There is a time limit for claiming input VAT, generally within six months after the end of the relevant tax period.

Output VAT Demystified

Output VAT is the tax that a registered business charges and collects on its sales of taxable goods and services. Essentially, it is the VAT you add to your prices when selling to customers.

Important aspects of output VAT in Kenya:

1. Businesses or a tax payer act as tax collectors, charging VAT on behalf of the Kenya Revenue Authority (KRA).
2. The standard rate of VAT in Kenya is currently 16% for most taxable supplies.
3. Businesses must declare and pay the collected output VAT to KRA, minus any allowable input VAT deductions.

The VAT Calculation Process

The VAT payable (or refundable) is calculated by subtracting input VAT from output VAT. If output VAT exceeds input VAT, the difference is paid to KRA. If input VAT is greater, the excess can usually be carried forward or, in some cases, refunded.

Importance of Proper Record-Keeping and Documentation

Recent court cases have underscored the critical importance of maintaining accurate and complete VAT records (Section 43 VAT Act) and other tax-related documents. In Saxon Investments Ltd v Commissioner of Domestic Taxes (Tax Appeal 333 of 2023) [2024] KETAT 840 (KLR), the Tax Appeals Tribunal emphasized that the burden of proof in tax matters lies with the taxpayer (Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act). This means businesses must be prepared to substantiate their VAT claims with proper documentation.

Documentation Requirements for Input VAT Claims

To claim input VAT in Kenya, businesses must maintain proper documentation (Section 17 (3) of VAT Act), including:

• Original tax invoices or certified copies
• Customs entries and payment receipts for imports
• Credit or debit notes for adjustments

Additionally, Section 43 of the VAT Act requires taxpayers to keep comprehensive records including:

• Copies of all tax invoices and simplified tax invoices issued in serial number order
• Purchase invoices and customs entries
• Details of amounts of tax charged on each supply made or received
• Tax account showing totals of output and input tax
• Stock records
• Details of each supply of goods and services from business premises

Burden of Proof and Additional Documentation

When the tax authority raises questions or concerns about fraud, forgery, or missing trader schemes, as regards the documents provided in a claim for Input VAT, the burden of proof shifts to the taxpayer to demonstrate the legitimacy of their input VAT claims. This principle was reinforced in the High Court case of Commissioner Investigations And Enforcement v Sangyug Enterprises(K) Limited (Income Tax Appeal E056 of 2020) [2022] KEHC 59 (KLR).

In such cases:

1. The taxpayer must provide additional documentation beyond just invoices and receipts to prove the authenticity of transactions.
2. The Kenya Revenue Authority (KRA) has the power under Section 59 of the Tax Procedures Act to request additional information and documents to verify tax claims.
3. Taxpayers must be prepared to demonstrate that their suppliers actually exist, have physical premises, and conducted genuine business transactions.
4. Failure to provide sufficient documentation may result in disallowance of input VAT claims.

Time Limits for VAT Claims

The VAT Act (Section 17) stipulates specific time limits for VAT claims:

• Input VAT must generally be claimed within six months after the end of the tax period in which the supply or importation occurred.
• Refund claims for excess input VAT in certain situations must be lodged within 24 months from when the tax becomes due and payable.

Conclusion

Understanding the interplay between input and output VAT is essential for businesses operating in Kenya. It affects cash flow, tax liability, and overall financial management. Equally important is maintaining meticulous records and being prepared to provide comprehensive documentation to support VAT claims, especially when faced with scrutiny from Kenya Revenue Authority.

Recent legal cases have emphasized that the onus is on the taxpayer to prove the validity of their tax positions. Businesses and generally tax payers must be vigilant in maintaining proper documentation and be prepared to substantiate their VAT claims beyond just providing invoices, particularly when faced with allegations of fraud or involvement in missing trader schemes.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. For specific legal guidance on tax assessments, objection decisions, agency notices, tax disputes, tax matters, or litigation at the Tax Appeals Tribunal, please consult with a qualified tax professional or legal advisor.