Kenya VAT — 16% standard, zero-rated and exempt
Which rate applies to what, how the KES 5M registration threshold works and how to file VAT3 every month with eTIMS-signed invoices.
Kenya operates a VAT regime under the Value Added Tax Act 2013, with a standard rate of 16% and limited zero-rated and exempt categories listed in the First and Second Schedules. Registration is mandatory once taxable turnover crosses KES 5 million in any 12-month period — voluntary registration is available below the threshold. The combination of eTIMS (real-time invoice signing) and the monthly VAT3 return on iTax means that input VAT can only be claimed from suppliers whose invoices carry a valid CU Invoice Number and QR code, making non-compliant suppliers commercially uncompetitive.
- Standard rate: 16% — default for almost every taxable supply.
- Zero-rated: exports of goods and services plus First Schedule items.
- Exempt: Second Schedule items (financial services, education, healthcare).
- Registration threshold: KES 5 million taxable turnover in any 12 months.
How it works
Identify the correct rate per line at the point of sale. Most goods and services attract 16%. Zero-rated supplies (exports, certain agricultural inputs, specific pharmaceuticals) are taxable at 0% — the supplier still issues a tax invoice but charges no output VAT and can recover related input VAT. Exempt supplies (financial services, insurance, residential rent, certain education and health) are not within the VAT system at all.
Register on iTax when taxable turnover crosses KES 5 million in any rolling 12-month period. Registration must happen within 30 days of crossing the threshold. KRA issues a VAT number tied to the existing PIN — there is no separate VAT identifier as in some other jurisdictions. Voluntary registration below KES 5M is allowed and often useful for B2B suppliers whose customers want to reclaim input VAT.
Issue every sales invoice through eTIMS with the correct VAT rate code. eTIMS recognises tax rate identifiers A (16% standard), B (zero-rated), C (exempt) and D (8% — historically used for petroleum, now largely standardised at 16% after the Finance Act 2023). Each line carries its own code; mixed invoices are fine.
Track input VAT only from eTIMS-signed purchase invoices. From January 2024 KRA disallows any input VAT claim or income tax deduction tied to non-eTIMS invoices. Build a vendor-onboarding step that verifies every supplier is eTIMS-registered before raising a purchase order.
File the VAT3 return on iTax by the 20th of the month following the tax period. iTax pre-populates sales from eTIMS data; you reconcile and add purchases. Pay the net VAT through M-Pesa Paybill 222222 or bank — late filing attracts a penalty of KES 10,000 or 5% of tax due (whichever is higher) plus 1% monthly interest.
Legal framework
- Value Added Tax Act 2013 (consolidated).
- VAT Regulations 2017 and subsequent amendments.
- Finance Act 2023 (rate harmonisation and eTIMS link).
- Tax Procedures Act 2015 (penalties and interest).
Frequently asked questions
What is the difference between zero-rated and exempt in Kenya?
A zero-rated supply is taxable at 0% — the supplier issues a normal tax invoice with VAT shown as zero and can recover all input VAT incurred on related purchases. An exempt supply is outside the VAT system: no output VAT, but the supplier also cannot reclaim input VAT on costs that relate to that supply. Exports are the typical zero-rated case; financial services and residential rent are typical exempt cases.
Can a non-resident supplier register for Kenyan VAT?
Yes — and from 2022 it is mandatory for non-resident digital service providers (streaming, marketplaces, SaaS) selling to Kenyan consumers, regardless of turnover. KRA runs a simplified VAT on Digital Marketplace Supply registration on iTax, and the supplier remits 16% on B2C sales. B2B sales to VAT-registered Kenyan customers may use the reverse charge mechanism under section 10 of the VAT Act.
How does input VAT recovery actually work?
Input VAT on purchases is recoverable only if (a) the purchase invoice is signed through eTIMS by a registered supplier, (b) the goods or services are used for taxable (standard or zero-rated) supplies, and (c) the claim is made within 6 months of the invoice date. For mixed-use, an apportionment is required. Refunds for zero-rated suppliers are processed by KRA but typically take 60–120 days to clear.
What about the 8% rate that used to apply to petroleum?
The 8% rate on petroleum products was introduced by the Finance Act 2018 as a political compromise. The Finance Act 2023 returned petroleum to the standard 16% rate as part of the consolidation around eTIMS. eTIMS still exposes the D rate code for backward compatibility — but for current supplies almost everything is either A (16%), B (0%) or C (exempt).
When is the VAT3 return due and what are the penalties?
VAT3 is due monthly, by the 20th of the month following the tax period — even for nil returns. Late filing attracts a penalty of KES 10,000 or 5% of the tax due (whichever is higher) plus 1% interest per month on the unpaid tax. Repeated non-filing escalates to a stop-filer notice and possible deregistration. iTax automatically applies the penalty on the due date if no return is filed.