Value Added Tax (VAT) registered taxpayers with vatable and exempt supplies are expected to use the partial allocation formula when determining the deductible VAT input for every tax period.
Business supplies
Every taxpayer has supplies from their operations. The supplies are in the form of goods and services. There are many VAT registered taxpayers who sell vatable goods and services in Kenya.
The goods and services are sold at the standard tax rate of sixteen (16) per cent and zero rate at zero (0%) per cent. Note that Zero (0%) per cent is a tax rate and it is not the same as exempt.
The taxpayers may also have goods and services that are not taxable. The goods and services are exempt from VAT. For these goods, there is no tax rate and there is no tax.
Monthly VAT analysis
After the closure of the tax period which is normally one calendar month, every VAT registered taxpayer is expected to account for VAT input and VAT output for the month. For the VAT output, the taxpayer will add up all VAT output on sales both cash and credit sales irrespective of whether the payments have been received by the seller or not.
For the VAT input, the taxpayer will add all the VAT input incurred on cash and credit purchases of goods and services irrespective of whether they have been paid for and or not. The taxpayer will determine the VAT input that is deductible for the month.
In cases where the taxpayer has only vatable sales (16% and 0%), the VAT deductible is the total VAT input incurred on purchases of goods and services in the month unless there is a specific prohibition for the deduction.
However, in cases where taxpayers have both vatable (16% and 0%) and exempt sales, all the VAT input incurred is not deductible; the VAT input must be allocated.
How is the allocation done?
Types of VAT inputs
For taxpayers who have both vatable and exempt sales, they have three possible types of VAT inputs. There is VAT input that is directly attributable to the vatable sales (16% and 0%), VAT input directly attributable to exempt sales and VAT input directly attributable to both the vatable sales and exempt sales.
Deduction of VAT input
The VAT input is deducted as follows.:
a) VAT input that is attributable to vatable sales (16% and 0%) – deduct all the VAT input.
b) VAT input attributable to exempt sales – do not deduct any VAT input. Use the VAT input as part of the cost for income tax purposes.
c) VAT input that is attributable to both vatable and exempt sales – allocate the VAT input between vatable sales and exempt sales.
How is the VAT input allocated?
Allocation of VAT Input
The VAT input is allocated proportionally using the provided formula. The assumption is that the VAT input is used proportionately in the production of vatable and exempt sales.
Kenya Revenue Authority (KRA) provided a formula used to determine the VAT input attributable to vatable sales and exempt sales. The formula is commonly referred to as partial exemption (allocation) formula.
The formula
C = [A/(A +B)] x 100%
Where:
- A is vatable sales.
- B is exempt sales.
- C is the percentage of the amount of VAT input that is attributable to vatable sales.
However, there are rules set up by KRA to be followed in determining the percentage to deduct.
- In case C is more than ninety (90) per cent, the total VAT input will be deducted.
- In case C is less than ten (10) per cent, no VAT input is deducted.
- When C is between ninety and ten per cent, only the percentage of the VAT input is deducted.
Example:
Alex sells both vatable goods and exempt goods. In April 2018, Alex had a total sales amount kshs 200,000. Exempt sales were kshs 150,000. Kshs 45,000 was VAT input on purchase of raw materials used only for the manufacture of vatable sales. Kshs 35,000 was VAT input on purchase of raw materials used only for the manufacture of exempt goods. The VAT input on shared goods and services was kshs 60,000.
Questions: i) What percentage is deductible VAT input? ii) What is the deductible VAT input?
Answer:
Percentage of deduction:
- Vatable sales – kshs 50,000 (A)
- Exempt sales – kshs 150,000 (B)
- VAT Input is kshs 60,000
50,000/(50,000 + 150,000) x 100% =
50,000/200,000 x 100% = 25 %
Amount of VAT deductible:
Since 25% is more than 10% but less than 90 %, Alex will only be able to claim 25% of the VAT input attributable to both vatable and exempt sales. The amount will be:
25 % x kshs 60,000 = Kshs 15,000
From the worked example, only the VAT input attributable to vatable sales is deducted.
Way forward
The taxpayer needs to determine the portion of the common VAT input that is attributable to vatable sales. Failure to do this will result in over-claiming the VAT input thus paying less VAT.
The taxpayer will incur tax liabilities as principal tax, penalties and interest. Therefore, for the taxpayer to save on extra tax payments, the taxpayer should prepare throughout the month.
In cases where the taxpayer has both vatable and exempt sales, it is important to continuously separate the transactions as follows:
- VAT input incurred in purchases of inputs that are used to manufacture of vatable sales.
- VAT input incurred in purchases of inputs that are used to manufacture of exempt sales.
- VAT input incurred in purchases of inputs that are used to manufacture or are incurred for both vatable and exempt sales such as VAT input on telephone bills, electricity etc.
- Vatable sales (separate 16% sales from 0% sales)
- Exempt sales.
After the closure of the tax period, the taxpayer will not have difficulties determining the VAT input attributable to the taxable sale from purchases used for production of both vatable and exempt sales.
Thank you for reading the article.
Dr. Wakaguyu Wa Kiburi.
