VAT 2

VAT: taxable value, time of supply, input tax and computation

1Scope and legal basis

Sections 12 to 17 of the VAT Act 2013 set the mechanics: when a supply takes place (the time of supply, section 12), the taxable value (sections 13 and 14), the deduction of input tax (section 17) and the restrictions on it, and the treatment of credit notes, bad debts and adjustments. The Tax Laws (Amendment) Act 2024 removed the old 90/10 rule so that a person making both taxable and exempt supplies now deducts input tax in the taxable proportion whatever the ratio, and the Finance Act 2026 extended the bad debt refund window to three years and required an input tax adjustment where goods bought as taxable become exempt while unsold. The monthly VAT return computes output tax on supplies whose time of supply fell in the month, less deductible input tax on invoices dated within the preceding six months and declared by the supplier on eTIMS, less withholding VAT credits, to arrive at the tax payable or the credit carried forward.

2Key definitions

Time of supply (tax point)

The earliest of: the date goods are delivered or made available or services are performed; the date a certificate is issued by an architect, surveyor or consultant for construction work; the date an invoice is issued; and the date payment is received in whole or in part. For continuous supplies (utilities, rent, subscriptions) each periodic invoice or payment is a tax point; for exports, the date the export confirmation documents are held; for imports, the date of customs entry.

Taxable value

The consideration for the supply (money and the open market value of anything else), exclusive of VAT, including any duty, levy, fee or charge paid or payable other than VAT, and any incidental costs (packing, transport, insurance, commission) charged by the supplier; less discounts allowed at the time of supply. For imported goods: customs value plus import duty plus excise duty plus other levies. For a supply between related persons, or for no consideration, the open market value. Hire purchase financial charges by licensed HP providers are excluded (Finance Act 2026).

Deductible input tax

Tax on taxable supplies and imports acquired for use in making taxable supplies, supported by a valid electronic tax invoice or import entry, claimed in the return for the period or within six months after the end of that period, and (since 2023) only where the supplier has declared the sale in its own return.

Blocked input tax

Input tax that is never deductible even for a fully taxable business: passenger cars and minibuses and their spare parts (unless the business is dealing in or hiring them), entertainment, restaurant and accommodation services (unless supplied in the ordinary course of that business or to employees where the employer's premises are away from home), and supplies used for exempt supplies or non-business purposes.

Tax invoice, credit note and debit note

The electronic tax invoice from eTIMS is the only document that supports a deduction; a credit note reduces output tax where a supply is cancelled, returned or discounted after the invoice, and a debit note increases it; both must be issued within the time the Act allows and referenced to the original invoice.

3Charge, computation and rates

Output tax

Output tax = 16% × taxable value on standard-rated supplies whose tax point fell in the month (0% on zero-rated, nil on exempt). Where the price is VAT-inclusive, the VAT fraction is 16/116 (for example a KES 11,600 inclusive price contains KES 1,600 of VAT on a value of 10,000).
Deemed supplies: goods taken from the business for private use, gifts of business goods above a nominal value, stock and assets on hand at deregistration, and the misuse of goods or services acquired exempt or zero-rated for a purpose (Finance Act 2025) are supplies at open market value.
Mixed and composite supplies: a single price covering standard-rated and exempt or zero-rated elements is apportioned unless one element is incidental to the other; a tour operator's own supplies are exempt but resold third-party supplies are not (Finance Act 2026 clarification).
Agents: an agent acting in its own name is treated as making the supply; an agent acting in the principal's name accounts only for its commission. Labour outsourcing charges are disbursements for the employment costs and VAT applies only to the service margin (Finance Act 2026).
Disposal of repossessed assets by a lender enforcing security is exempt (Finance Act 2026); sale of a business as a going concern is exempt (2024).

Input tax and apportionment

Purchase	Deductible?	Why
Trading stock, raw materials, packaging for standard or zero-rated sales	Yes	Used for taxable supplies
Plant, computers, office furniture, commercial vehicles (lorries, pick-ups, vans)	Yes	Business assets for taxable supplies
Saloon car for the sales manager; its spares, fuel is deductible but the car is not	No	Passenger cars are blocked unless the business deals in or hires them
Staff Christmas party, client dinners, hotel accommodation for a director on business travel	No	Entertainment, restaurant and accommodation are blocked (except for employees away from home in the course of duty, and hotel businesses)
Inputs for exempt supplies (a bank's IT system; a school's textbooks; a landlord's residential block repairs)	No	Attributable to exempt supplies
Overheads of a mixed business (audit fees, electricity, rent of shared premises)	Partly	Deductible in the proportion taxable supplies bear to total supplies for the period, since the 90/10 rule was repealed in December 2024
Invoice older than six months at the return date	No	Time-barred; claim within six months of the tax period
Purchase from an unregistered supplier, or a supplier who has not declared the sale on eTIMS	No	No valid tax invoice, or supplier non-declaration blocks the claim
Import VAT paid at customs on machinery	Yes	Import entry is the evidence; deductible in the month of entry or within six months

Tumaini Traders Ltd, VAT return for August 2026
Sales (exclusive): standard-rated local sales KES 8,000,000; exports 2,000,000 (documents held); exempt sales of unprocessed produce 1,500,000. Total supplies 11,500,000; taxable proportion (8,000,000 + 2,000,000) / 11,500,000 = 86.96%.
Purchases (exclusive) with VAT at 16%: stock for standard sales 4,000,000 (VAT 640,000); packaging for exports 500,000 (VAT 80,000); produce for exempt sales 900,000 (no VAT charged, exempt); overheads 1,200,000 (VAT 192,000); a saloon car 3,000,000 (VAT 480,000); a lorry 5,000,000 (VAT 800,000); staff party 200,000 (VAT 32,000).
Output tax: 16% × 8,000,000 = 1,280,000; exports 0; exempt nil. Total output tax 1,280,000.
Input tax: stock 640,000 (fully deductible); export packaging 80,000 (deductible; zero-rated supplies are taxable); overheads 192,000 × 86.96% = 166,963 (apportioned); car nil (blocked); lorry 800,000 (deductible); party nil (blocked). Total deductible input tax 1,686,963.
Withholding VAT credits from appointed agents on the month's sales: 2% × 3,000,000 of sales to a parastatal = 60,000.
VAT position: 1,280,000 - 1,686,963 - 60,000 = a credit of KES 466,963, carried forward to September; because the excess arises partly from zero-rated exports, the exporter may apply for a refund of the portion attributable to the zero-rated supplies (here 2/10 of the taxable input tax by the statutory formula) within twelve months.

Adjustments, bad debts and refunds

Credit notes for returns, cancellations and post-supply discounts reduce output tax in the month issued; the customer reduces its input tax correspondingly. A credit note must be issued within six months of the supply (or the Commissioner's approval obtained).
Bad debts: where a registered person has accounted for output tax and the debt remains unpaid for three years (or the debtor is insolvent), the supplier may apply for a refund of the VAT within three years of it becoming due (extended from two by the Finance Act 2026); if the debt is later paid, the VAT is repaid.
Refunds: excess input tax is ordinarily carried forward, but a refund may be claimed within twelve months (five years for income tax overpayments) where the excess arises from zero-rated supplies, from withholding VAT, or from tax paid in error; the Commissioner audits and pays within the statutory period, with interest for delay, and offsets against other tax due. A supply that becomes zero-rated or exempt leaving a permanent credit may be relieved under the 2024 provision.
Change of use: input tax on goods bought for taxable use that become exempt (or a supply that becomes exempt while stock is unsold) is adjusted by the original deduction method (Finance Act 2026); goods acquired for exempt use later used for taxable supplies may earn a deduction on change of use.
Capital goods: input tax on plant and buildings used for taxable supplies is deductible in full at acquisition; a later change to exempt use triggers a clawback proportionate to the remaining life.

4Compliance: returns, payment and penalties

The registered person maintains a VAT account reconciling output tax, input tax, credits and payments to the monthly return, issues eTIMS invoices at the tax point (an invoice raised late or a sale not invoiced through eTIMS is an offence and the buyer loses the deduction), files the VAT 3 return by the 20th of the following month with the sales and purchases schedules that eTIMS now pre-populates, and pays the net tax the same day. Input tax is claimed only against invoices in the supplier's declared sales; the six-month window for late claims is strict. Late filing costs the higher of 5% of the tax and KES 10,000, late payment 5% plus interest at 1% a month, and a false claim for input tax or a refund attracts the tax shortfall penalty (75% if deliberate) and prosecution for fraud, with penalties of double the tax. Refund claims are made on iTax with the export documents or withholding certificates and are subject to verification audit.

5Examinable focus

What KASNEB tests

The monthly VAT computation is set in nearly every paper: list the supplies, classify each (standard, zero, exempt), compute output tax, then go through the purchases marking each as deductible, blocked or apportioned, apply the taxable proportion to overheads (no more 90/10 rule), deduct withholding VAT credits, and state the payable or credit, the filing date and the refund position for an exporter. Use 16/116 for inclusive prices. Theory parts ask for the time of supply rules, the taxable value of imports, the blocked items and why they are blocked, the treatment of bad debts (three years) and credit notes, and the effect of the eTIMS supplier-declaration rule on input tax.