By Monica Ngage

Value Added Tax (VAT) is a term you’ve probably heard tossed around, especially when making purchases or running a business. But what exactly is VAT, and how does it affect you? In this blog, we’ll break down VAT in simple terms, explaining the tax burden and who ultimately pays for it. We’ll also explore what expenses businesses can claim and those they can’t under the VAT Act in Kenya.

Understanding VAT Burden and Incidence

Tax incidence in simple terms refers to the person who is obliged to file and pay the tax while tax burden is the tax implication i.e. who feels the final impact of tax. At its core, VAT is a consumption tax. It’s added to the price of goods and services at each stage of production or distribution. But who ends up footing the bill? Let’s break it down:

  1. Businesses: Businesses are the ones who collect VAT on behalf of the government. They add VAT to the selling price of the goods or services they provide. In this case therefore the tax incidence lies with the businesses.
  2. Consumers: You and I, the consumers, are the ones who ultimately pay VAT. When we buy something, the price includes VAT. So, we’re the ones who bear the burden of the tax.

It’s like a chain reaction – businesses collect VAT from consumers, then pass it on to the
government.

Allowable and Disallowable Expenses under the VAT Act in Kenya

Now let’s talk about what expenses businesses can claim and those they can’t under the VAT
Act in Kenya.

  • Allowable Expenses:

Business Inputs: VAT paid on things businesses need to operate, like raw materials, machinery, and services, can usually be claimed back. This helps
businesses reduce their tax bill.

Exported Goods and Services: If a business exports goods or services outside of Kenya, they can often get a refund on the VAT they paid. This encourages
businesses to sell their products abroad.

  • Disallowable Expenses:

Personal Expenses: VAT on things for personal use, like clothes or groceries, can’t be claimed back. This makes sense since it’s meant for business-related
expenses.

Exempt Supplies: Some things are exempt from VAT altogether, like basic food items, certain medical supplies, and educational services. This means businesses can’t claim back the VAT they paid on these items.

In conclusion, understanding who bears the burden of VAT and what expenses are allowable or disallowable under the VAT Act can help businesses manage their finances better and consumers understand the costs they incur. So, next time you see VAT on a receipt, you’ll know exactly what it means and who’s paying for it.