Kenyan businesses will have to adjust to a number of changes in the way Value Added Tax (VAT) is treated following the enactment of the Finance Act 2026.
The Kenya Revenue Authority (KRA) says the changes affect areas including VAT refunds on bad debts, invoicing, digital payment services, outsourcing arrangements, hire-purchase transactions, tourism services and selected VAT exemptions.
For businesses, the changes mean that reviewing invoices, contracts and tax records will be increasingly important to ensure VAT is being applied correctly.
Businesses to Wait Three Years for Bad-Debt VAT Refunds
One of the key changes affects businesses that have accounted for VAT on sales but have not received payment from their customers.
Under the new provisions, a business that has accounted for VAT on a taxable supply but whose payment remains unpaid and qualifies as a bad debt will have to wait three years before applying for a VAT refund.
The waiting period has therefore increased from two years to three years.
KRA advises affected businesses to maintain proper documentation, including invoices, evidence of efforts to recover the outstanding debt and other relevant records.
VAT Should Only Be Charged on Taxable Supplies
The Finance Act 2026 also clarifies that VAT should only be charged where the underlying supply is taxable.
This means being VAT-registered does not automatically mean that a business should add VAT to every invoice it issues.
Businesses are expected to correctly classify the goods or services they provide before applying VAT. Where a supply is exempt, VAT should not be added simply because the supplier is VAT registered.
Businesses Face Input VAT Adjustments When Supplies Become Exempt
Another change concerns businesses whose supplies move from being taxable to exempt.
Where a registered person has unsold stock on which input VAT had previously been deducted, the business is required to account for that input tax in the tax return for the period in which the supplies became exempt.
The adjustment is calculated using the same method that was originally used to deduct the input tax.
Where the adjustment results in excess input tax, the resulting tax is payable to the Commissioner.
Digital Payment Services Subject to VAT
Businesses operating in the digital payments sector should also take note of changes affecting payment service providers.
KRA says fees and commissions charged for specified digital payment services are subject to VAT at the standard rate.
The affected services include payment processing, settlement, merchant acquiring, payment gateway and aggregation services provided through software or digital platforms.
The VAT applies to the fee or commission charged by the payment service provider for the service, rather than the underlying amount being transferred.
Returning Passengers Get Higher VAT-Free Allowance
Returning passengers are also affected by a change to the VAT-free allowance for qualifying goods brought into Kenya.
The allowance has increased from US$300 to US$2,000.
However, KRA notes that the threshold remains subject to applicable customs rules and eligibility requirements. Returning passengers therefore need to confirm that their goods qualify for the exemption before claiming it.
New Clarity on Outsourcing Employee Costs
The Finance Act 2026 has also clarified the VAT treatment of employee-related costs in outsourcing arrangements.
KRA says employee costs incurred by a supplier when providing outsourcing services to a client are excluded from the taxable value of the outsourcing service.
These costs include salaries, wages, statutory deductions and other related employee expenses.
For businesses involved in outsourcing, the change could affect how the taxable value of their services is determined when costs are passed on to clients.
Hire-Purchase VAT Treatment Linked to Supplier Licensing
The treatment of finance charges under hire-purchase arrangements has also been clarified.
Finance charges may be excluded from the taxable value of goods supplied under a hire-purchase agreement where the supplier is licensed in accordance with the Hire Purchase Act.
KRA says businesses should therefore not assume that every financing arrangement resembling hire purchase automatically qualifies for the exclusion.
The agreement must fall within the applicable legal framework and meet the relevant licensing requirements.
Tour Operators Get Greater VAT Clarity
The Finance Act 2026 has also provided greater clarity on the VAT treatment of services offered by tour operators.
The Act defines a tour operator as a tour or safari operator licensed by the authority responsible for regulating the tourism sector. It also defines “in-house supplies” in relation to the VAT exemption available to qualifying tour operator services.
Businesses operating in the tourism sector will therefore need to confirm that they meet the applicable requirements before treating their services as exempt.
Selected Goods and Services Exempted
The new legislation also provides VAT exemptions for selected goods and services.
Among the items covered are dialyzers, scrap metal, qualifying pharmaceutical inputs, bioethanol vapour stoves and selected infrastructure-related supplies.
However, the application of an exemption depends on the relevant conditions, classification and documentation.
What Businesses Should Do
KRA says the VAT changes will not affect all businesses in the same way.
For a business dealing with unpaid invoices, the three-year waiting period for a bad-debt VAT refund could be the most significant change.
For another, the key issue could be whether VAT is being correctly applied to invoices. Businesses in digital payments, tourism, outsourcing and hire purchase will also need to review the provisions relevant to their operations.
KRA is urging businesses to review their invoices and contracts, confirm the classification of their goods and services and maintain records supporting their VAT claims and transactions.
The changes under the Finance Act 2026 therefore make it important for businesses to understand not only what has changed, but how those changes apply to their specific transactions.
For businesses uncertain about the correct VAT treatment, seeking professional or official clarification before applying the tax treatment could help prevent costly errors.
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