The document is an updated version of the Kenya Value Added Tax Act, incorporating significant changes from the Finance Act 2025. These updates focus on expanding the tax base within the digital economy, reclassifying the VAT status of essential goods, and tightening compliance through electronic systems.

Charge to Tax and Rates:

• Standard Rate: The standard VAT rate remains at 16% on all taxable supplies and personal importations.

• Digital Marketplace Supplies: VAT is explicitly charged on taxable services supplied through a digital marketplace. This includes electronic services such as streaming, cloud computing, and digital content, regardless of whether the provider is a resident or non-resident.

• Time of Supply: For digital services, the time of supply is defined as the earlier of the date the payment is received or the date the invoice is issued.

Reclassification of Goods and Services:

• From Exempt/Zero-Rated to Standard Rated (16%): Several items previously exempt or zero-rated have been moved to the standard rate to increase revenue:

  • Certain specialized equipment for the energy and manufacturing sectors.

  • Specific fertilizers and agricultural inputs that do not meet new "essential" criteria.

• New Exemptions: To mitigate the cost of living, the Act introduces exemptions for:

  • Supplies to the Defence Forces Welfare Services.

  • All inputs and raw materials used in the manufacture of mosquito nets.

  • Supply of denatured spirits for industrial use.

• Zero-Rating: Exported services remain zero-rated, but the Act clarifies that "exported services" must be for the benefit of a person outside Kenya and not used for the consumption of a resident.

Input Tax Deductions:

• e-TIMS Compliance: A critical update is that input tax is only deductible if the purchase is supported by a valid electronic tax invoice (e-TIMS). If a supplier is not compliant with e-TIMS, the buyer cannot claim the input VAT.

• Six-Month Rule: The window for claiming input tax remains six months from the date of the invoice. Any claims made after this period are disallowed.

• Apportionment: For businesses making both taxable and exempt supplies, the rules for apportioning input tax have been tightened to prevent over-claiming.

VAT Registration and Compliance:

• Registration Threshold: The mandatory registration threshold remains at an annual turnover of KES 5 million. However, the Commissioner may now require a person to register regardless of the threshold if they are involved in certain high-risk sectors or digital marketplace operations.

• Deregistration: The Commissioner can now proactively deregister a taxpayer who fails to file three consecutive VAT returns or fails to utilize their e-TIMS system for a specified period.

VAT on Insurance and Financial Services:

• Insurance Premiums: While most insurance premiums remain exempt, the Finance Act 2025 clarifies that insurance agency and brokerage services are subject to VAT at the standard rate of 16%.

• Financial Services: The Act maintains exemptions for core financial services (interest, currency exchange), but administrative fees and commissions charged by financial institutions are taxable.

Payment and Refunds:

• Due Date: VAT returns and payments must be submitted by the 20th day of the following month.

• Refunds for Overpaid Tax: Taxpayers can apply for a refund of overpaid VAT arising from zero-rated supplies. The Commissioner is required to process and pay these within six months, or the taxpayer may opt to use the credit to offset other tax liabilities (Income Tax, Excise, etc.).