CAPITAL DEDUCTIONS AND VALUE ADDED TAX

CAPITAL DEDUCTIONS
This is a deduction an investor is allowed to make on capital expenditure incurred on industrial
building and machines used for business purposes.

Types of capital allowance

Capital allowance include.
1. Wear and tear allowance
2. Industrial building deduction
3. Investment deduction
4. Farm works deduction.
Investment deduction: Is a capital deduction given on cost of buildings and machinery which
are used for manufacture on cost of a ship, and on cost of a hotel building.
The investment deduction on buildings and machinery is intended to encourage new investments
in the manufacturing sector.
The investment deduction is deducted in the income tax computation, or in arriving at the taxable
income / loss.
Industrial Building allowance: This is a capital deductions or allowance given in respect of
capital expenditure on an industrial building.
The amount of industrial building allowance is deducted in the income tax computation or in
arriving at the taxable income / loss for year or period.
Wear and Tear allowance: The wear and tear deduction is a capital deduction on machinery
used for business. The deduction is made against income.
Farm works deduction: This is a capital deduction granted only in respect of capital
expenditure on agricultural land. The farm works deduction is deduction in the income tax
computation.

Objectives of granting capital allowances

1. To attract investment.
2. To encourage industrialization.
3. To create economic growth.
 4. To create employment
5. To encourage manufacture for exports

INVESTMENT DEDUCTION OF BONDED MANUFACTURE (IDBM)

Bonded manufacture is a scheme under which a manufacturer is licensed by custom department
to manufacture goods for export. The raw materials and machines imported for the manufacture
of export is exempt from custom duty. The manufacturer is required to deposit a security with
the custom department to ensure the goods manufactured have been exported.

Rates for IDBM

100% in the first year
Conditions to be met by the manufacturer to qualify for IDBM
1. The manufacturer should have been licensed by the custom department for the
manufacture of export.
2. The goods manufactured should be exported.
3. The manufacturer should continuously manufacture for exports for at least three years
failure to which the IDBM granted is withdrawn and treated as taxable income in the year
of cessation.

SHIPPING INVESTMENT DEDUCTIONS (SID)

This is an investment deduction granted to a resident ship owner who carries on the business of
carrying goods and passengers within the Kenyan water.
Rates for SID
40% in the first year of use; with effect from 1st January 2012, it is 100%
Note: If a ship qualifies for SID at the rate of 40%, 60% of residue cost qualifies for Wear and
tear allowance at the rate of 12 ½ % under class IV.

Conditions to be met for a ship to qualify for SID

1. Cost of purchasing a new ship which is more than 495 tons tare weight.
2. Cost of purchasing of a second hand ship of more than 495 tonnes weight and cost of
refurbishing it.
 3. A ship can only qualify for SID once in its life time.
4. If a ship having qualified for SID is sold before expiry of five years, the SID granted is
withdrawn and treated as taxable income in the year of sale.

MINING ALLOWANCE
This is an investment deduction granted to an investor who incurs capital expenditure on mining
operations.

Rates for mining allowance

First year 40%, from the second to the seventh year – 10% per annum.
Note: A mine is assumed to have a life span of 7 years.

Costs qualifying for mining allowances

1. Cost of searching, testing and gaining access to the mineral.
2. Cost of acquiring rights over the mineral deposit.
3. Cost of buying specialized mining machines which would have little value if mining stopped.
4. Cost of constructing building on the mining site which would have little value in mining
stopped.
5. Cost of development, general administrative expenses and consultancy fees incurred before
the commencement of mining.

INDUSTRIAL BUILDING DEDUCTIONS

This is a capital allowance granted to an investor who incurs capital expenditure on an industrial
building.

Definition of an Industrial Building

This is a building
a) Which is used as a factory or a mill.
b) A building used to subject goods to some process.
 c) A building used for commercial transport undertaking, a dock, berth, Warf, navigation
channels, bridge etc.
d) A building used for the storage of raw materials or finished products e.g. a warehouse, go
down.
e) A building used by agricultural contractors to provide services to farmers for the storage
of farm machine e.g. ploughing or crop threshing machines.
f) A building certified by the minister for finance through a notice on Kenya Gazette as an
industrial building namely;
i) Hotel buildings and any related structure e.g. kitchens, staff quarters,
entertainment facilities and sporting facilities.
ii) A commercial building with services e.g. water, electricity, parking.
iii) A residential building with services e.g. water, electricity.
iv) Educational building and hostels.
v) A building used for the welfare of workers e.g. staff canteen, staff clinic, staff
social hall, staff reporting facilities.
vi) A building used for the dwelling of workers namely staff quarter.
g) Civil works like
i) Roads and parking areas.
ii) Railway lines and related structures.
iii) Water, industrial effluent and sewerage works.
iv) Security wall and fencing
v) Communications and electrical and other electricity supply and works.

Rates for Industrial Building Deductions

1. Factory buildings and hotels with effect from 1st January 2010 is 10% on cost previously;
Factory buildings – 5%, Hotels – 4%
2. Residential buildings with services 25% with effect from 1st January 2010 previously 5%.
3. Commercial buildings with services with effect from 1st January 2010, 25%
4. Educational buildings and hotels with effect from 1st January 2010, 50th previously 25%
Classification of machines for purposes of wear and tear.
1. Class One 37.5%
This include
- Tractors
- Combine harvesters
- Lorries 3 tones and above
- Caterpillars
- Excavators
- Graders
- Essers
- Mobile cranes
- Forklifts
- Tippers
- Prime goods movers
- Pick up 4 tonnes.

2. Class Two (30%)

This include office equipment of an electronic nature.
- Computers
- Printers
- Scanners
- Duplicators
- Copiers
- ETR machine
- Cash registers
- Bar code readers
- Electronic type – writers
- Fax machines
- Calculators
3. Class Three (25%)
This include self - propelling vehicles not found in class one
- Saloon cars
- Pick – ups
- Delivery vans
- Nissans
- Lorries below 3 tons
- Aircrafts
- Motorcycles
- Tuk- tuk (Rickshaw)
4. Class Four (12.5%)
This include any other office equipment and machinery not found in class.
- Trailer (without - Curtains - Generators
tract) - Carpets - Water pump
- Manual type writers - Portions - Water tanks
- Bicycles - Shelves - Feeding troughs
- Ships - Counters - Fixed crane
- Wheelbarrows - Furniture - CCTV cameras
- Carts - Milking machines - Fans
- Ploughs - TV sets - Air conditioner
- Proceeding machines - Micro waves - Telephone
- Conveyor belts - Electrical kettles - Mobile phone
- Weigh - Boilers - Switch box
- Pack

5. Class V
Computer software – 20% straight line
Telecommunication equipment – include optical fibre cable for service providers (straight
line), 20% on cost.
Wear and tear schedule
In order to compute wear and tear allowance, a wear and tear schedule is prepared as follows:
Class 1 Class 2 Class 3 Class 4
WDV b/d xx xx Xx Xx
Add: Additions Xx Xx Xx Xx
Less: Disposals (xx) (xx) (xx) (xx)
Cost qualifying for WTA xx xx xx xx
WTA (xx) (xx) (xx) (xx)
WTA c/d Xx xx xx xx

Additional notes on wear and tear allowance

1. Wear and tear allowances is computed on a reducing balance basis.
2. Written Down Value (WDV) is equal cost of assets less accumulated Wear and tear
allowance or
WDV = Cost (I –r) n Cost = WDV
(l –r) n
Where r = rate of WTA
n = number of years an asset has existed in business.
3. Where a business has operated for less than 12 months, the Wear and tear allowance
should be reduced proportionately. Where the business has operated for 12 months, full
year Wear and tear allowance should be computed irrespective of when the asset was
acquired.
4. If the business is sold to another person, the new owner will claim Wear and tear
allowance based on the purchase price of the asset and NOT their old written down value.
5. Additions;
i) The purchase price of the assets is taken as the additional value.
ii) If an asset is acquired through hire purchase, the cash price is the additional value.
iii) If an asset is acquired through trade – in the additional value is the cash paid plus
the value of the old asset traded – in.
 iv) For assets brought into the business without payment of any money e.g. inherited
assets or donated assets, their opera market value is their additional value.
v) For non – commercial vehicles found in Class III i.e. saloon cars, the additional
value is restricted to the following amounts:
1998 – 2005 – Sh. 1,000,000
2006 – to date – Sh. 2,000,000

ILLUSTRATION 1
Safari Processing Company Ltd was established in 2011 and commenced operation on incurring
the following capital expenditure.
Sh.
Factory building 4,800,000
Computers 280,000
Staff clinic 1,720,000
Staff quarters 1,600,000
Go down 1,800,000
Processing machinery 2,400,000
Factory building includes a retail shop and showroom constructed at a cost of Sh. 400,000 and
Sh. 700,000 respectively. On 1 September 2011, the company, purchased furniture for Sh.
200,000 and a motor car for Sh. 3,000,000.
Required:
Capital allowances due to the company for the year of income ended 31 December 2011.
SOLUTION
Capital allowances due to the company:
Safari processing company
Capital allowances for the year ended 31st December 2011

Investment deduction (ID) 2011

Nature of an asset Qualifying Cost ID rate 100% Residue to WTA / IBD 0%
Sh. Sh.
Factory building (W1) 3,700,000 3,700,000 -------
Processing machinery 2,400,000 2,400,000 --------
6,100,000

Working - 1
Sh.
Factory building including retail and shown and showroom 4,800,000
10% rule: 10% x 4,800,000 = 480,000
OR: (The higher of)
Showroom: 700,000
Retail shop: 400,000 1,100,000
(1,100,000)
Qualifying Cost for factory building 3,700,000

IBD 2011
Nature of an asset Qualifying cost Residue b/d IBD (5%) Residue to WTA
Sh. Sh. Sh.
Staff clinic 1,720,000 - 86,000 1,634,000
Staff quarters 1,600,000 - 80,000 1,520,000
Go down 1,800,000 - 90,000 1,710,000
256,000
 Wear and tear Schedule
Class Class I Class II Class III Class IV
37.5% 30% 25% 12.5%
Sh. Sh. Sh. Sh.
W/D V as at 1/1/11 Nil Nil Nil Nil
Additions
Computers - 280,000 - -
Furniture - - - 200,000
Motor car - - 2,000,000 -
Q cost Nil 280,000 2,000,000 200,000
WTA Nil (84,000) (500,000) (25,000)
WDV as at 1/1/2012 Nil 196,000 500,000 175,000

ILLUSTRATION 2
Mawego Ltd has been in the soap manufacturing business for eight years. The company’s fixed
assets movement schedule for the year ended 31 December 2008 was as shown below:
Plant Machinery and Moto vehicles Furniture and fittings
Sh. “000” Sh. “000” Sh. “000”
Cost as at 1 January 2008 12,000 3,000 1,400
Additions for the year 3,000 4,200 200
Depreciation for the year 2,000 210 140

The written down values of assets for tax purposes, together with their net book values as at 1
January 2008 were as follows:

Tax written down value Net book value

Sh. “000” Sh. “000”
Class I 1,000 800
Class II 400 380
Class III 2,100 1,800
Class IV 800 900

Additional information
1. The additions of assets as shown in the fixed assets movement schedule comprised.
Item Cost Sh. “000” Date of purchase
Tractor (including trailer costing Sh. 400,000) 2,000 1 February 2008
Computers 300 1 March 2008
Saloon car 2,200 1 April 2008
Furniture and fittings 200 1 April 2008
Factory machinery 1,200 1 June 2008
Office equipment 400 1 July 2008
Conveyor belt 600 1 July 2008
Workshop machinery (second hand) 200 1 August 2008
Packaging machinery 300 1 December 2008

2. The company’s building comprised.

Tax residual value as at January Date of first use
2008 Sh. “000”
Factory building 1,750 1 January 2002
Labour quarters 740 1 January 2005
Go – down 395 1 July 2007

3. During the year ended 31 December 2008, the company constructed additional labour
quarters at a cost of Sh. 2 million which were utilized from 1 September 2008.
4. The company reported a profit of Sh. 10 million before deducting capital allowances. This
profit was after debiting and crediting the following items, among others.

Sh. “000”
Salaries and wages 6,000
Taxes paid 1,000
Qualifying dividend received (net) 680
Interest received (net) 850
Depreciation 2,350
Proceeds from sale of motor vehicle 500
Required:-
For the year ended 31 December 2008 compute: Capital allowances due to the company.

SOLUTION
a) Capital allowances due to the company
Investments Deductions (ID)
2008 item Qualifying cost Rate Allowance
Sh. “000” Sh. “000”
Factory machinery 1,200 100% 1,200
Conveyer Belt 600 100% 600
Packaging 300 100% 300
machinery 2,100

Industrial Building Deductions (IBD)

Item Qualifying WDV b/d Rate Allowance WDV c/d
cost Sh. Sh. “000” Sh. “000” Sh. “000”
“000”
2008
Factory building 2,058.82 1,750 5% 102.941 1,647.059
Labour quarters 800 740 5% 40 700
Go down (395/39.5 x 40) 400 395 5% 20 375
Labour quarters 2,000 - 5% 100 1950
262.941
 Wear and Tear allowance schedule
Class 1 Class II Class III Class IV
37.5% 30% 25% 12.5%
Sh. “000” Sh. “000” Sh. “000” Sh. “000”
WDV b/d 1,000 400 2,100 800
Additions
Tractor 1,600 - - -
Trailer - - - 400
Computers - 300 - -
Furniture - - - 200
Office Equipment - - - 400
Workshop Machinery - - - 200
Saloon Car - - 2,000 -
2,600 700 4,100 2,000
Allowance (975) (210) (1,025) (250)
1,625 490 3,075 1,750
 VALUE ADDED TAX
INTRODUCTION AND DEVELOPMENT OF VAT
This is a tax on local sales and importation of taxable goods and services. VAT is paid by the
consumers of taxable goods and services. It is collected by registered traders who act as
collection agents for the government.
Taxable supplies
These are goods and services which are subject to VAT under the VAT Act.
VAT Registration
A person who deals with taxable supplies and whose turnover exceeds. Sh. 5 Million should
register for VAT.
On registration the trader is issued with a certificate which should be displayed in a prominent
place within business premises.
Change of registration particulars
A registered person should notify the commissioner with 14 days of the following changes.
1. Change of address
2. Acquisition of additional business premises.
3. Business premises cease to be used.
4. Change in business name.
5. Acquisition of more than 30% of the ordinary share capital.
6. Change of partners.
7. Change in the person authorized to change the returns.
8. Change in the class of goods a business deals with.
Deregistration
1. Death of the trader.
2. The business is declared bankrupt.
3. The turnover falls below 5 million
4. The trader is declared bankrupt.
5. The business is sold as a going concern.
6. The classes of goods the business deals with are declared VAT exempt by the government.
7. The business stops dealing with taxable supplies.

Note: If the turnover of business does not exceed Sh. 5 million a trader can still opt for voluntary
registration to enjoy benefits of VAT registration.
Benefits of VAT Registration
1. Right to deduct input tax from output tax.
2. Right to get a refund.
Rights of a registered person
1. Right to deduct input tax
2. Right to get a refund.
3. Right to meet the commissioner or any senior VAT officer.
4. Right to be assisted by VAT department to comply with VAT rule.
5. Right to object to the commissioner assessment.
6. Right to appeal to VAT tribunal.
7. Right to be treated fairly and with equity.
Obligations of a Tax Payer
1. To charge VAT on supplies made.
2. To pay VAT by the due date
3. To file VAT monthly returns.
4. To keep proper VAT records.
5. To issue a tax invoice to customers when a taxable supply is made.
6. To install an ETR machine.
7. To provide information and documents during VAT audit.
8. To allow VAT officer access to the business during a VAT tribunal.
9. To answer summons of the VAT tribunal.
10. To display a VAT registration certificate.
11. To register for VAT.
Tax Point / Time of Supply
This is the time when a taxable supply is considered to have taken place and when the trader
should charge VAT. The tax point is the earlier of the following.
1. When the goods or services are provided to customers.
2. When an invoice is issued to customers.
3. When payments is received for all or part of the supply.
4. When a certificate is issued by an architect or the supervisor of a project.
For imported services the tax point is earlier of:
1. When imported services is consumed.
2. When the invoice is received.
3. When part or full payment is made.
Significance of tax point
1. It determines when a trader should charge VAT.
2. Determines the rates to be used when computing VAT.
 3. Determines when VAT is payable to the government.
Meaning of supply
A taxable supply include
1. The sale, supply or delivery of taxable goods to another person.
2. The sale or provision of taxable services to another person.
3. Donating a taxable good or service as a gift.
4. Leasing or hiring or transferring taxable goods.
5. A registered person withdrawing taxable goods from business for personal use.
6. A registered person providing a taxable service to him / herself.
7. Disposal of taxable goods.

When VAT is charged

VAT should be charged when:
1. The supply is taxable.
2. The supply is made by a taxable person.
3. The supply is made in Kenya
4. The supply is made in the course of furtherance of business.
VAT Rates
There are three rates VAT
1. Standard rate – 16%
2. Special rate – 12% is on electricity
3. Zero rate – 0% - for zero rated goods.
Types of supplies
1. Taxable supplies
These are goods and services subject to VAT at the rate of 16% or 12%
2. Zero rated supplies
These are goods and services which are subject to vat at the rate of 0%
Consequences of Zero Rating
1. A trader is required to register for VAT
2. A trader can deduct input tax.
3. A trader is expected to file VAT return.
4. Charge VAT

3. Exempt supplies
These are goods and services which are completely exempt from VAT.
Consequences of exempting
 a) A trader is not required to register for VAT
b) A trader cannot deduct input tax.
c) A trader is not expected to file VAT return
d) A trader cannot charge VAT.
VAT Records
A registered person is required to keep the following records for VAT purposes.
1. Copies of all sale invoices and purchase.
2. Copies of credit and debit notes.
3. A VAT account showing total output tax, total input tax and VAT payable or refundable.
4. Copies of customs entry forms and receipts of custom duty paid receipts on imported
goods.
5. Details of amount of VAT charged on each supply made or receipt.
6. Details of taxable good manufactured and delivered form a factory.
7. Details for taxable goods and services supplied form business promises.
8. Copies of stock records.
9. Journals, ledgers, cash and petty cash book, audited financial statements and the bank
statements. Note : These records should be kept in English or Swahili for at least 5 years.
Tax invoice
A registered person must issue an invoice to customers for every supply made. The tax invoice
informs the customers.
1. VAT paid and the rate charged.
Significance of a Tax invoice
1. Used to claim refunds when input tax exceeds output tax.
2. Used to claim refund on VAT paid in respect to bad debts.
3. Used to support deduction of input tax in the VAT returns.
4. Provides evidence that a taxable supply has taken place.
Contents of a Tax Invoice
1. Address, name and pin number of buyer and seller.
2. Date of supply.
3. Value of supply
4. Description of the goods.
5. Amount of VAT charged and the rate
6. Details of VAT if the transaction is cash or credit.
7. Serial number of the invoice.
8. Serial number of ETR machine used to print the invoice.
9. The logo of the business.
 Note: With effect from 16th June 2006 a tax invoice should be generated using an ETR
device.
Value of supply
This is the price at which taxable goods or services are provided. The amount is multiplied
by the rate of VAT to arrive at the VAT payable.
VAT payable = 16% of price (where VAT is not inclusive)
Where price is VAT inclusive:
VAT = t of price
L+t

t = rate of VAT = 16 = 16
100+ 16 116

Rules of determining the value of supply

1. Where the buyer and the seller are independent parties, the value of supply is the selling
price.
2. Where the buyer and the seller are not independent parties, the value of supply is the open
market selling price.
3. When determining the value of supply, cost incurred by the seller when delivering the
products to the buyer should not be included.
4. When determining the value of supply, the following costs should be included – cost of
packing or container, or container or any other non – returnable container, or container or
any other non – returnable container cost the buyer has to pay the seller.
5. For imported goods, the value of supply should include the custom duty paid. VAT on
imported goods = 16% of (C.I.F value of imports + Custom duty paid)
6. For goods sold on hire purchases term the value of supply the cash price.
7. If the buyer is offered a discount, the value of supply is the discount price.
Output Tax
This is VAT charged by a registered person on sales made to customers or VAT collected from
customers.
Input TAX
This is VAT paid by a registered person when making purchase of goods, business assets and
when paying expenses.
VAT payable to the government = Output tax – Input tax
VAT is not a business expense as the trader will recover from input tax.
Non – Deductible Input Tax
1. Input tax paid on exempt goods.
2. Input tax not incurred in the furtherance of business.
3. Input tax on fuel and oil used in vehicle, ships and other vessels.
4. Input tax on passenger vehicles spare parts and the repair of vehicles except where used in
supply of taxable goods or services.
5. Input tax on passenger vehicles and mini – buses except where used for leasing or hiring.
6. Input tax on leasing of passenger vehicles and mini – buses.
7. Input tax on furniture and fitting except those for use in hotels and restaurant.
8. Input tax on entertainment services.
9. Input tax on restaurant services.
10. Input tax on accommodation services.
11. Input tax on taxable supplies for staff housing and welfare e.g. office tea, mineral water,
staff canteen or staff transport.
12. VAT on household or domestic electrical appliance except where they are used to
manufacture taxable supply e.g. in hotel.

Partial exemption
Where a registered trader sells both taxable and exempt supplies, the deductible input tax should
be restricted using the following formula.
Deductible Input Tax = Taxable assets x Input tax
Total sales

Taxable sales = Standard sales + Zero rated sales

Total sales = Standard sales + zero rated sales + Exempt sales.

ACCOUNTING FOR VAT

A registered trader is required to maintain a VAT account every month clearly showing total
output tax, total input tax, VAT payable or refundable.

VAT Account (general format)

Input Tax Sh. Output Tax Sh.
VAT on purchase xx VAT on sales xx
VAT on purchases return (xx) VAT on sales returns (xx)
VAT on debit notes received xx VAT on credit notes issued (xx)
VAT on payment of expenses xx VAT on debit notes issued xx
VAT on purchase of business xx VAT on experts (Zero – rated) -
assets xx
VAT on imported goods xx
 VAT on paid bad debts xx
VAT withheld by agents xx
Balance c/d (VAT Payable) xx
xx xx

Note: if the input exceeds the output tax, the difference represents the VAT refundable.

ILLUSTRATION
KK Ltd is a registered supplier of vatable goods. The following information relate to the
company transaction for the month of October 2011.
1. Sales of standard rate Sh. 36 million.
2. Sales of zero rate Sh. 14 million.
3. Export sales Sh. 4 million
4. Exempt sales Sh. 6 million.
5. Purchases at standard rate Sh. 30 million.
6. Purchase of zero rate Sh. 12 million.
7. Salaries and wages Sh. 6 million.
8. Purchase of ETR machine Sh. 120,000.
The amounts above are stated VAT exclusive. Determines VAT payable or returnable for month
of October 2011.

SOLUTION
Output Tax
Sh.
Standard sales 16% of 36,000,000 5,760,000
Zero rated sales 0% x 4,000,000 -
-
5,760,000

Input Tax
Sh.
Standard purchase 16% of 30,000,000 4,800,000
Zero rated sales 0% of 12,000,000 -
ETR 16% of 120,000 19,200
4,819,200

Deductible input tax = 54m (36 + 14 + 4) x Sh. 4,819,200 = Sh. 4,337,280

60m
Taxable sales = 36m + 14m = 54m
Total sales = 54m + 6m = 60m
VAT payable = Sh. 5,760,000 – Sh. 4,337,280 = Sh. 1,422,726

ILLUSTRATION
Biashara Ltd is registered for V.A.T. In August 2010, the company imported goods costing Sh.
2.4 million excluding freight charges of Sh. 60,000. The company then incurred Sh. 400,000 to
transport the goods form the port to the warehouse. The processing costs were 20% of the
relevant cost incurred up to time of processing. The goods were sold at a profit margin of 33
1/ %.
3

Required:-
The VAT payable on the above transaction. Use a VAT rate of 16% and 25% custom duty.

SOLUTION
Input tax
Sh.
Cost of goods 2,400,000
Freight charges 60,000
2,460,000
Custom duty 25% of 2,460,000 615,000
Value of supply 3,075,000

VAT = 16% x 3,075,000 = 492,000

Output Tax
Sh.
Cost of goods 2,400,000
Freight 60,000
Custom duty 615,000
3,075,000
Transport 400,000
3,475,000
Processing costs 20% of 3,475,000 695,000
4,170,000
Mark up = 1 = 1 = 50% of 4,170,000 2,085,000
3–1 2 6,255,000
VAT = 16% x 6,255,000 = 1,000,800
VAT payable = Output tax – Input tax
= 1,000,800 – 492,000
= Sh. 508,800

ILLUSTRATION
Under VAT regulations, the value of supply is the price at which goods are provided. Calculate
the value of supply and the VAT payable under each of the following circumstances.
1. Ucheza Ltd imported computers worth Sh. 15 million a duty of 25% was charged by custom
department.

Solution
Input Tax Sh.
Cost of computers 1,500,000
Custom duty 25% of 1,500,000 375,000
Value of supply 1,875,000

VAT = 16% of 1,875,000 = 300,000

2. ART Kenya Ltd sold a fridge by hire purchase for Sh. 165,000 HP price. The cash price of
the fridge was Sh. 96,000. Calculate value of supply and VAT payable.

Solution
Value of supply = Sh. 96,000
VAT payable = 16% x 96,000 = Sh. 15,360

3. The price of a motor car was Sh. 2.5 million. A cash discount of 20% was allowed to Peter
when he bought the motor vehicle. Calculate the value of supply and VAT payable.

SOLUTION
Value of supply = Discounted price = 80% x 2,500,000 = Sh. 2,000,000
VAT payable = 16% x 2,000,000 = Sh. 320,000
4. Simon and Kamau a professional accounting firm provided free accounting services to
Mathare Trust a charitable Trust taking care of victims of Mathare tragedy valued at Sh. 2.4
million.

SOLUTION
Value of supply = Sh. 2,400,000
VAT payable = 16% x 2,400,000 = Sh. 384,000

5. ABC Ltd purchased goods worth Sh. 1.2 million from Kolor Ltd. This excluded the cost of
packaging charged by Kolor Ltd amounting to Sh. 96,000. Calculate the value of supply and
VAT payable.

SOLUTION
Cost of packaging 1,200,000
Value of supply 96,000
1,296,000
VAT payable = 16% x 1,296,000 = Sh. 207,360

6. ABC Ltd imported goods from the buyer whose landed value was 2,450,000. Duty was
charged at the rate of 25%. Other charges included; transport to the company premises Sh.
110,000 and a commission of 5% of dutable value paid to the clearing agent.
Required
Determine the amount of VAT payable.

SOLUTION
Input Tax
Sh.
Cost of goods 2,450,000
Custom duty paid is 25% of 2,450,000 612,500
Value of supply 3,062,500

VAT = 16% of 3,062,500 = Sh. 490,000

Output Tax

Sh.
Cost of goods 2,450,000
Custom duty 612,500
3,062,500
Transport 110,000
3,172,500
 Commission paid is 5% of 2,450,000 122,500
3,295,000

VAT = 16% of 3,295,500 = Sh. 527,200

VAT payable = Output tax – Input tax
= 527,200 – 490,000 = Sh. 37,200

ILLUSTRATION
The following purchases and sales were made by Pepo Limited (VAT No. !00012Y) during the first two
weeks of January 2016. Prices shown are inclusive of VAT at the standard rate of 16 percent.

PURCHASES SALES
Unit Price per Unit Price per
Unit Unit
Sh. Sh.
January 1 100 1,400 10 1,800
2 20 1,800
5 50 1,800
7 75 1,600
10 20 1,800
12 - 50 2,000
175 150

There were no opening stocks at the beginning of the month.

The physical inventory confirmed that there were 25 units in stock as at 31 January 2006.

Required:
(i) The VAT account for Pepo Limited.
(ii) What are the requirements with respect to any sales made by Pepo Limited?
(iii) Specify when and how VAT computed under (i) is payable.
SOLUTION

PEPO LTD VAT NO. A00012Y

VAT ACCOUNT JANUARY 2016

INPUT TAX Sh. OUTPUT TAX Sh.

June 1 Purchases June 1
16 16
(100 units x 1,400 x ) 19,310 (10 units x 1,800 x ) 24,838
116 116
June 7 purchases June 2 Sales
16 16
(75 units x 1,600 x ) 16,552 20 units x 1,800 x 4,966
116 116
June 5 sales
16
50 units x 1,800 x 12,414
116
June 10 sales
16
(20 units x 1,800 x ) 4,966
116
June 12 sales
16
VAT Payable 25,115 (50 units x 2,000 x ) 13,793
116
60977 60977

(ii) Requirements with respect of any sales made

To issue/furnish the purchaser with a tax invoice at the time of supply or within fourteen
(14) days of the completion of that supply. To record all sales made in the sales journal and
account and the value added tax element reflected in the value added tax income. Other
records include credit and debit notes, customs entries, ledgers, copy of tax invoice, etc. To
charge VAT at the right rate on the sale made.

(iii) VAT 3 Return form is a payment return. The return and a banker’s cheque are required to be
submitted to the Commissioner VAT not later than the 20th day of the month following the month
in which the sale took place. Where the 20th day for submission of returns falls on a public holiday, a
Saturday or a Sunday, then the return and payment must be submitted on the last working day prior
to that day. Payment returns should be submitted to any of the commercial banks or Central Bank
nearest to your business.
ILLUSTRATION
Sponex Limited deals in a wide variety of low-price sports goods. Shown below is a list of transactions for
the month of June 2016.

June 2 Purchased goods on credit from Marun Shoes of Sh.96,000

June 3 Paid freight charges of Sh.2,450 on the shipment of goods purchased from Manrun
Shoes
June 4 Upon unpacking the goods from Manrun Shoes, discovered that some of the shoes
were the wrong style. Returned those shoes which cost Sh.4, 000 to Manrun Shoes
and received full credit.
June 9 Sales made on account to Ripa Sports for Sh.141,000
June 11 Paid Sh.2, 200 freight charges on the shipment to Ripa Sports.
June 12 Paid Marun Shoes in full
June 16 Made credit sales to Holiday Sports for Sh.27,550
June 19 Received payment in full from Ripa Sports.
June 21 Holiday Sports returned goods worth Sh.6,500

All transactions were subject to Value Added Tax where applicable. The rate of VAT is 16%.

Required:
(a) Sportex Limited Value Added Tax Account for June 2016
(b) If the amount calculated above is not paid on time, what penalties will be imposed?

SOLUTION
SPORTEX LIMITED

Value Added Tax For June 2016

INPUT TAX Sh. OUTPUT TAX Sh.
June 2 Purchases June 4 Returns out
(Sh.96,000 x 16/116) 13,241.4 (Sh.4, 000 x 16%) 640
June 11 Freight June 9 Sales
(Sh.2,200 x 16/116) 303.4 (Sh.141,000 x 16/116) 19,448.3
June 21 Returns in June 16 Credit sales
(Sh.6, 500 x 16%) 1,040 (Sh.27,550 x 16/116) 3,800
VAT payable 9,303.5 ______
23,888.3 23,888.3

(c) If amount of VAT payable as calculated above is not paid on time then a penalty higher of
Ksh.10,000 or 5% of VAT due is imposed plus interest at rate of 2% per month compounded.