Effective from September 1, 2023, all businesses, regardless of whether they are registered for Value Added Tax (VAT) or not, are required to generate and transmit their invoices electronically to the Kenya Revenue Authority (KRA) via the electronic Tax Invoice Management System (eTIMS).
This move is part of the provisions of the Finance Act, 2023 and aims to streamline tax administration in the country.
In a notice issued on November 8, 2023, KRA further clarified that any business expenditure not supported by an eTIMS-generated tax invoice will not be deductible for tax purposes from January 1, 2024.
“All persons carrying on business, including those not registered for VAT, are required to electronically generate and transmit their invoices to KRA via the electronic Tax Invoice Management System (eTIMS),” said KRA.
“Please note that any business expenditure not supported by an eTIMS-generated tax invoice shall not be deductible for tax purposes with effect from January 1, 2024.”
This means that businesses must ensure all their transactions are recorded in the eTIMS to avoid complications when calculating their taxes.
In Kenya, the concept of Input and Output tax is crucial in understanding how VAT works.
Input tax is the tax paid by a registered person on the purchase of goods or services for their business. On the other hand, Output tax is the tax charged on the sales of taxable goods or services.
The tax payable by a business is the difference between the Output and Input tax. This system ensures that businesses are only taxed on the value they add in the process of producing goods or services.
However, it also presents a significant challenge in tax administration, as businesses must accurately record and report their Input and Output taxes.
The introduction of the eTIMS is expected to address this challenge by providing a platform for businesses to accurately record their transactions and automatically calculate their Input and Output taxes.
By requiring all businesses to use the eTIMS, KRA aims to improve the accuracy and efficiency of tax administration in Kenya.
However, this change also places a new responsibility on businesses.
They must now familiarize themselves with the eTIMS and ensure all their transactions are recorded in the system.
Failure to do so could result in their business expenditures not being deductible for tax purposes, which could significantly increase their tax liability.
Therefore, it’s crucial for businesses to understand and comply with these new requirements to avoid potential tax issues in the future.