Non Deductible Input VAT

The Kenyan VAT system is based on the difference between VAT output and VAT Input .Not all VAT input is allowable for deduction. The below cases are not allowable for VAT purposes in Kenya:

a)Improper Tax Invoice

Where no proper tax invoice has been issued ,the law prohibits deduction of such input VAT. A proper invoice should have the following:

Purchasers Name

Purchasers address

ETR receipt or ESD signature.

Clearly shows the net amount,VAT and the gross amount

NB-A company’s invoice addressed to an employee of the company is not a proper invoice.

b)6 months rule

Input VAT is claimable only within 6-months following the issue of the invoice. Any Input VAT beyond the above time frame shall be forfeited.

c) Input VAT Attributable to exempt Sales

The VAT Act provides for reallocation of input VAT to both Vatable and exempt supplies. Where exempt supplies contribute to more than 10% of sales .Input VAT attributable to exempt sales becomes nondeductible

d) Exempt Sales

Where a trader deals with exempt supplies, he is automatically disqualified from claiming input VAT

e) Input tax on registration

The VAT Act 2013 provides that a taxpayer has a right to claim input tax incurred prior to the registration. This is only input tax that is intended for use in the production of taxable supplies.The input tax must be claimed within 3 month of registration. It must be input tax that was incurred within the last 24 months.

If the taxpayer fails to claim input within the specified period, the VAT incurred is lost. Equally, if the input VAT is more than 24 months, it automatically becomes non deductible

f) VAT not incurred in pursuit of business

VAT input will only be deductible if it was incurred in furtherance of business.

For instance,a trader cannot claim VAT on groceries he purchased for home use. Similary, an Tax Consultant cannot claim VAT for his Farming business in the Consultancy firm.

g) Prohibited input tax

In some other instances, the VAT Act prohibits deduction of input VAT actually incurred in furtherance of business income

A registered person shall not deduct input tax under this Act if the tax relates

to the acquisition of—

(1) passenger cars or mini buses, and the repair and maintenance thereof

including spare parts, unless the passenger cars or mini buses are

acquired by the registered person exclusively for the purpose of

making a taxable supply of that automobile in the ordinary course of

a continuous and regular business of selling or dealing in or hiring of

passenger cars or mini buses; or

(2) entertainment, restaurant and accommodation services unless—

(i) the services are provided in the ordinary course of the business

carried on by the person to provide the services and the

services are not supplied to an associate or employee; or

(ii) the services are provided while the recipient is away from

home for the purposes of the business of the recipient or the

recipient’s employer