Wondering if your small business in Kenya needs VAT registration? This verified 2025 guide breaks down the Ksh 5 million threshold, legal duties, penalties for non-registration, and compliance tips — based on current tax laws.
📘 What is VAT?
Value Added Tax (VAT) is a consumption tax charged on taxable supplies of goods and services made in Kenya, as per the VAT Act Cap. 476.
The standard VAT rate is 16%, unless a supply is classified as zero-rated or exempt under the law.
📌 Do All Small Businesses Have to Register for VAT?
No. VAT registration is mandatory only if certain conditions are met. Specifically, you must register if your annual taxable turnover exceeds Ksh 5 million.
This threshold is found under Section 34(1) of the VAT Act.
✅ Who Must Register for VAT?
You are legally required to register for VAT if:
- Your actual or projected turnover in a 12-month period exceeds Ksh 5,000,000
- You make taxable supplies (not exempt) in Kenya
- You are not solely dealing in exempt goods/services
📌 Note: There’s also voluntary VAT registration allowed under Section 34(3) of the VAT Act, even if you’re below Ksh 5M — as long as you make taxable supplies.
⚖️ What the Law Says
“A person who, in the course of a business, has made or is expecting to make taxable supplies… the value of which is Ksh 5 million or more in any twelve-month period, shall be liable for VAT registration.”
– Section 34(1), VAT Act (Cap. 476)
🚨 What If You Fail to Register?
Under the Tax Procedures Act, failing to register when required can lead to:
- Compulsory registration by the Commissioner
- Backdated VAT liability (including interest & penalties)
- Late filing penalties of Ksh 10,000 per month or 5% of the tax due, whichever is higher
The Commissioner may issue a notice of default registration if they believe you’ve crossed the threshold and failed to register voluntarily.
🛠️ How to Register for VAT on iTax
- Go to iTax Portal
- Log in with your PIN
- Choose ‘Amend PIN’ → Add “VAT” under tax obligations
- Provide turnover estimates and nature of supplies
- Submit and receive updated PIN certificate with “VAT obligation” status
📊 Benefits of (Voluntary) VAT Registration Below Ksh 5M
| Benefit | Reason |
|---|---|
| Claim Input VAT | Recover VAT on business purchases |
| Tender Compliance | Government tenders often require VAT registration |
| Tax Credibility | Builds client trust, especially B2B |
| Growth-Readiness | Helps you scale without surprise liabilities |
🛑 Important: VAT Doesn’t Apply If…
You’re not allowed to register for VAT if:
- You exclusively supply VAT-exempt goods/services
(e.g. education, medical, financial services) - Your total annual taxable sales are below Ksh 5M, and you don’t opt in voluntarily
💬 Frequently Asked Questions
Q: Can I register for VAT even if I earn less than Ksh 5M?
✅ Yes — Section 34(3) of the VAT Act allows voluntary registration, subject to approval by KRA.
Q: How does KRA determine if I’ve passed the threshold?
🔎 Through bank records, eTIMS invoices, imports, or tender records.
Q: Is VAT charged on exempt supplies?
❌ No. If all your supplies are exempt, you cannot register for VAT.
Q: Can KRA register me without my consent?
✅ Yes. If KRA believes you’ve passed the threshold, they can register you compulsorily under the Tax Procedures Act, Section 36(1)
📣 Call to Action
Know your VAT obligation before KRA flags your business!
💼 If your small business is nearing or over Ksh 5M turnover, act now.
💬 Need help with VAT registration or compliance? Ushuru.com is here for Kenyan SMEs.
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