The Kenya Revenue Authority (KRA) has published nine significant changes to Value Added Tax (VAT) introduced by the Finance Act 2026. These changes cover everything from refund timelines and invoice treatment to sector-specific rules for fintech companies, tour operators, and outsourcing firms. The changes aim to clarify VAT treatment for various businesses and transactions. KRA has urged businesses to review how the new provisions apply to their specific transactions.
One of the most direct changes for businesses concerns bad debt VAT refunds. The minimum waiting period before applying for a refund has moved from two years to three years. Businesses are advised to maintain proper records, including invoices and documentation of debt collection efforts, in preparation for the longer wait. This change is expected to impact businesses that have previously accounted for VAT on taxable supplies but have not received payment from customers.
The Finance Act also clarifies that a VAT invoice should only be issued where the underlying supply is actually taxable. VAT registration alone does not justify adding VAT to every invoice. If a supply is exempt, it should not carry a VAT charge, regardless of the supplier's registration status. This change aims to reduce errors in VAT invoicing and ensure compliance with tax regulations.
A separate adjustment rule applies when supplies that were previously taxable become exempt. Any input tax already deducted on unsold stock must be accounted for in the tax return covering the period when the exemption took effect, using the same method originally applied. Where this results in excess input tax, the amount must be remitted to the Commissioner. Businesses must ensure they are aware of these changes to avoid non-compliance.
The Finance Act introduces VAT exemptions for a selected range of goods and services, including dialyzers, scrap metal, qualifying pharmaceutical inputs, bioethanol vapour stoves, and certain infrastructure-related supplies. Businesses claiming these exemptions must confirm applicable conditions, classification, and supporting documentation before doing so. KRA has advised businesses to review their invoices and contracts to ensure compliance with the new exemptions.
KRA has identified key changes in VAT, including the extended waiting period for bad debt VAT refunds, VAT chargeable only on taxable supplies, and input VAT adjustment on newly exempt supplies. Other changes include VAT on digital payment services, higher duty-free allowance for returning passengers, and employee costs in outsourcing arrangements. Businesses must identify which changes apply to their specific transactions and seek clarification where necessary.
KRA has advised all businesses to review their transactions and seek clarification where the correct VAT treatment is unclear. Businesses must also maintain proper documentation, including demand notices, collection records, and internal approvals, to support their VAT claims. The changes are expected to impact various sectors, including fintech, tourism, and outsourcing. KRA aims to ensure compliance with tax regulations and provide clarity on VAT treatment for businesses.
Key points
- The waiting period for bad debt VAT refunds has been extended from two years to three years.
- VAT exemptions have been introduced for a selected range of goods and services, including dialyzers and qualifying pharmaceutical inputs.
- Businesses must review their invoices and contracts to ensure compliance with the new VAT changes.
