VAT 3
VAT: imported services, the digital marketplace, withholding VAT, refunds and eTIMS
1Scope and legal basis
Four mechanisms extend and secure the VAT base beyond the ordinary supplier-to-customer charge. Section 10 of the VAT Act reverse-charges imported services on the Kenyan recipient. Section 8 and the VAT (Digital Marketplace Supply) Regulations 2023 (with the Finance Acts 2023 and 2025 widening the definitions) require non-resident suppliers of digital services and electronic marketplaces to register and charge VAT to Kenyan consumers with no threshold. Section 25A and section 42A of the Tax Procedures Act appoint withholding VAT agents (government ministries, parastatals, banks, large companies) to withhold 2% of the taxable value on payments to suppliers and remit it, with the supplier claiming the credit; manufacturers with investments of at least KES 2 billion are exempt from withholding on their sales (2024). Section 30 governs refunds. Underpinning all of it is eTIMS, the electronic tax invoice management system under the VAT (Electronic Tax Invoice) Regulations 2020 and section 23A of the Tax Procedures Act, mandatory for every business from 1 January 2024 whether or not VAT-registered, with the Finance Act 2026 adding prepopulated returns and penalties for failing to confirm or amend them.
2Key definitions
3Charge, computation and rates
Imported services
Reverse charge for two recipients of a KES 5,000,000 consultancy from a UK firm
Mlima Manufacturing Ltd (fully taxable): accounts for output VAT of 16% × 5,000,000 = 800,000 in the month the service is invoiced or paid (the earlier), and deducts 800,000 as input tax in the same return. Net VAT cost nil; the reverse charge is a reporting entry. It also withholds income tax at 20% on the fee (12.5% under the UK treaty for management fees).
Amani Bank Ltd (exempt financial services): accounts for output VAT of 800,000 and can deduct only the proportion attributable to any taxable supplies it makes (say 5% for fee-based taxable services): input tax 40,000. Net VAT cost 760,000, which is why exempt businesses feel the reverse charge.
A private individual receiving a service from abroad (a Kenyan student buying a foreign online course) is not within the reverse charge; the non-resident supplier must instead register under the digital marketplace regime and charge 16%.
Digital marketplace supplies by non-residents
- A non-resident making supplies of services or digital content through the internet, an electronic network or a digital marketplace to a person in Kenya must register for VAT under the simplified regime within 30 days of the first supply, without any turnover threshold, either directly on iTax or through a tax representative; the recipient is treated as in Kenya where the payment card, billing address, IP address or mobile country code is Kenyan.
- The supplier charges 16% on the value of the supply, issues an invoice (not necessarily through eTIMS, though it must contain the prescribed information), files a monthly return and pays by the 20th of the following month in Kenyan shillings or a convertible currency. No input tax deduction is available under the simplified regime.
- Business-to-business supplies to Kenyan registered persons may instead be reverse-charged by the recipient where the supplier is not registered; the Finance Act 2025 expanded the definitions so that services 'over the internet, an electronic network or through a digital marketplace' by non-residents are within both VAT and excise duty (the Excise Duty Act now charges excisable services supplied by non-residents through digital platforms).
- The same supplies attract the significant economic presence tax at 3% of gross turnover for income tax (IT 11); VAT and SEP tax run in parallel.
- A Kenyan operator of a digital marketplace charges VAT on its own commission and, where the platform collects the price, may be treated as the supplier of the underlying service.
Withholding VAT and refunds
| Mechanism | Rule | Numbers |
|---|---|---|
| Withholding VAT | The appointed agent withholds on payment for taxable supplies (not on exempt or zero-rated supplies, not on imports, not on supplies by manufacturers with investment of at least KES 2 billion at 31 December 2024) and remits within five working days with a withholding VAT return; the supplier credits the certificates against its output tax and may claim a refund of an excess credit | 2% of the taxable value; the agent's failure to withhold or remit is penalised at 10% of the amount (Tax Laws (Amendment) Act 2024) |
| Refund of excess input tax from zero-rated supplies | Apply on iTax within twelve months of the tax period in which the excess arose; the refundable amount is limited to the input tax attributable to the zero-rated supplies by the statutory formula; the balance carries forward | Excess × (zero-rated supplies / total taxable supplies); paid after audit, with interest at 1% a month on refunds delayed beyond the statutory period |
| Refund of excess from withholding VAT | Where withholding credits exceed the net VAT payable persistently, apply for a refund within twelve months | Amount of the excess credit |
| Refund of tax paid in error | Apply within twelve months of the payment | Amount overpaid; offset against other taxes due first |
| Bad debt relief | After three years unpaid (or on the debtor's insolvency), apply for refund of the output tax accounted for, within three years of the debt becoming due (Finance Act 2026) | The VAT element of the unpaid debt |
| Diplomats, aid-funded projects, EPZ and SEZ | Supplies to them are zero-rated or exempt at source; a refund route exists for VAT charged in error |
The electronic tax invoice
- Every person carrying on business (not only VAT-registered persons) must issue an eTIMS invoice for each sale from 1 January 2024, using an eTIMS-enabled electronic tax register, a certified point-of-sale or ERP integration, the eTIMS Lite app or the online portal; businesses with turnover above KES 5 million may be required to integrate their systems with the KRA's data management system, with a penalty of up to KES 100,000 a month for non-compliance.
- A valid invoice shows the supplier's name, address and PIN, the buyer's PIN (required for the buyer to deduct), a serial number, the date and time of issue and of supply, a description and quantity, discounts, the consideration, the VAT rate and amount, and the KRA control number and QR code; credit and debit notes follow the same route and reference the original invoice.
- Buyer-initiated invoicing: a purchaser from a supplier who is exempt from eTIMS (turnover under KES 5 million, or a small-scale farmer) generates the invoice on the supplier's behalf so that the expense remains deductible (Tax Laws (Amendment) Act 2024).
- For income tax, an expense not supported by an eTIMS invoice is not deductible (section 16(2)(g)); for VAT, input tax is deductible only on an eTIMS invoice that the supplier has declared. The system therefore polices both taxes at once.
- Prepopulated returns: from the Finance Act 2026 the Commissioner may generate a VAT (or other) return from eTIMS and third-party data; the taxpayer confirms or amends it within the prescribed period, and failure attracts a penalty of the higher of 5% of the tax due, KES 100,000 for a company and KES 10,000 for an individual. Penalties arising from a proven system malfunction may be waived up to KES 2 million.
4Compliance: returns, payment and penalties
The recipient of an imported service accounts for the reverse charge in its VAT 3 return for the month of the tax point, whether or not it is otherwise VAT registered (a non-registered business or an exempt business must register for the purpose or file a reverse-charge return) and pays by the 20th. The non-resident digital supplier registers within 30 days, files monthly and pays by the 20th; failure to register allows the Commissioner to appoint a Kenyan agent (a payment processor or the customer) to account for the tax, and non-compliance blocks the supplier's access to Kenyan payment channels under the regulations. Withholding VAT agents remit within five working days and file the withholding return; suppliers reconcile the certificates on iTax and claim the credits in the month withheld. Refund claims are filed on iTax with supporting schedules and are audited before payment; a false refund claim is an offence with double-tax penalties. Failure to issue an eTIMS invoice is an offence with a penalty of double the tax due on the sale, and failure to keep the system operational must be reported to the Commissioner within 24 hours with manual invoices reconciled later.
5Examinable focus
What KASNEB tests
Expect a reverse-charge computation for a fully taxable versus an exempt recipient (the exempt bank bears the VAT), a question on when a foreign streaming or software company must register in Kenya and what it pays (16% VAT with no threshold, plus 3% SEP tax), and a withholding VAT part where the supplier's return shows the 2% credits and the resulting excess. Theory parts cover the purposes and mechanics of eTIMS, buyer-initiated invoicing, the link between an eTIMS invoice and both VAT and income tax deductions, the refund routes and time limits (twelve months; three years for bad debts), and the 2026 prepopulated-return penalties. Give the deadlines precisely: 20th of the following month for returns, five working days for withholding VAT.