Value added tax is tax on value added. In the course of furtherance of business a trader is by law required to charge tax on goods or services supplied (output tax) but is allowed to recover the VAT paid (input tax). To illustrate, let’s say a trader acquires item X at Sh.100 and sells it at Sh. 120. At a VAT rate of 16% he will pay Sh. 16 (16% of 100) on the purchase and charge Sh. 19.2 (16% of 120) on selling this item. This trader should pay Sh.19.2 (output tax) but must first be allowed to deduct Sh. 16 (input tax) thus will only pay Sh.3.2. Look, this trader added a value of Sh. 20 (120-100), 16% of 20 is actually Sh. 3.2. Technically, there is no VAT where there is no Value addition.
Following from above VAT is charged on supply of goods and services, then begs the question, what is a supply? The meaning of supply in VAT law is wide extending beyond ordinary trade. A person making regular or continuous supply of goods and services for a consideration is deemed to have made a supply even where such an activity is not for profit.
Offering Vatable goods and services for free amounts to a supply hence VAT applies.
VAT does not apply on everything, some goods and services are exempted. There is another category of items which are subject to VAT but at Zero rate. The VAT act 2013, gives a detailed schedule of exempt goods and another schedule for Zero rated items. The third category in VAT is the standard or general rate where VAT is currently charged at 16% (8% for fuel). Unfortunately the Act does not give a listing for standard rate items but the other two are given. If an item is not zero rated or exempted from VAT, it follows that item is subject to VAT. However, it is important to note that VAT registration applies to persons with annual turnover of more than Sh. 5 Million.
VAT becomes due and payable on the 20th day of the Month following the supply. Registered persons are required to issue their clients with fiscal receipts generated from electronic tax registers. Newer version of ETR by the name Tax invoice management system (TIMS) comes into effect on 1 August 2022.
For details on entire scope of VAT visit- https://taxdon.co.ke/value-added-tax/