Kenya’s Tax Laws Amendment Act: VAT Changes & DST Abolition Explained

January 17, 2025

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The Tax Laws Amendments came into effect in December 2024, amending several laws, including the Income Tax Law, Value Added Tax (VAT) Law, Excise Duty Law, and various other tax laws. The amendments to the VAT laws include repealing the threshold set out under the input tax, delisting exempt goods, amending certain VAT exemptions, and introducing new VAT exemptions.

Impact of the Amendments

The amendments added a new paragraph to Section 17 of the VAT Law addressing the effects of the change in applicable rates. More specifically, it addresses situations where a supply was taxable at the standard rate of 16% before July 1, 2022, then subsequently enjoyed a reduced rate of 8% and eventually became zero-rated or exempted, leading to excess VAT credits. Under the amended rules, businesses can apply to the Commissioner for relief within six months of the commencement of the provision.

Amendments to the VAT Law included the deletion of specific provisions marking the removal of threshold that previously allowed a full input tax deduction for businesses making more than 90% taxable supplies. Under the newly established rule, input VAT can only be claimed following the principle of proportionality, meaning that input VAT can be claimed proportionately to the business's taxable supplies.

VAT exemption was broadened to include the National Intelligence Service and the Defence Forces Welfare Services. This decision should harmonize the VAT treatment of all goods supplied for official use by security agencies.

One of the most significant changes is eliminating the 1.5% Digital Service Tax (DST) and replacing it with the 3% Significant Economic Presence (SEP) tax. Although the SEP does not apply to non-residents whose annual turnover is below KES 5 million, the Act regulating SEP does not foresee a substantial economic presence emerging from the user base, making the SEP tax closely resemble the DST.

Conclusion

Resident and non-resident taxable persons should closely examine how new rules and regulations affect their businesses and VAT responsibilities. Moreover, non-resident taxpayers should familiarize themselves with the SEP tax legislation and determine whether they are subject to it.

Source: PwC

What are the key changes to VAT under Kenya’s Tax Laws Amendment Act?

The Act introduced proportional VAT input claims, new VAT exemptions, and changes to tax rates, impacting businesses’ VAT compliance requirements.

What is the Significant Economic Presence (SEP) tax, and how does it differ from DST?

The SEP tax, replacing the 1.5% DST, applies a 3% tax on revenues of non-residents with substantial economic activities in Kenya, excluding those with annual turnovers below KES 5 million.

Who qualifies for the newly introduced VAT exemptions?

The exemptions apply to supplies for the National Intelligence Service, Defence Forces Welfare Services, and other specified goods for official use by security agencies.

How does the proportional VAT input claim work under the new rules?

Businesses can now claim input VAT proportionate to their taxable supplies, replacing the prior threshold that allowed full input VAT deduction for businesses making 90% taxable supplies.

What should businesses do to manage VAT credits from rate changes?

Businesses must apply to the Commissioner for relief on excess VAT credits within six months of the amendment’s commencement if rate changes resulted in VAT credit surpluses.

Are non-resident digital service providers affected by the SEP tax?

Yes, non-residents earning over KES 5 million annually in Kenya are subject to the SEP tax. However, the SEP tax does not consider the user base as a factor for substantial economic presence.

Digital Services Tax (DST)

VAT

Retail

E-Commerce

Digital