VAT for Service-Based vs Product-Based Businesses: What You Need to Know
Value Added Tax (VAT) applies differently depending on whether your business provides services or sells products. Understanding these differences is key to staying compliant and optimizing your tax management.
VAT on Product-Based Businesses
Product-based businesses charge VAT on the sale of physical goods. The standard VAT rate in Kenya is 16%, which you add to the sale price.
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Example: Selling electronics for KES 20,000 + 16% VAT = KES 23,200 total.
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Input VAT can be claimed on goods purchased for resale or production.
VAT on Service-Based Businesses
Service providers charge VAT on services rendered. Services like consultancy, legal advice, or event planning attract VAT at the standard rate (16%) unless exempted.
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Example: A consulting service charged at KES 50,000 + 16% VAT = KES 58,000 total.
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Input VAT can be claimed on business expenses related to service delivery.
Key Differences to Note
| Aspect | Product-Based Business | Service-Based Business |
|---|---|---|
| VAT Application | On sale of physical goods | On provision of services |
| Input VAT Claim | On raw materials & goods | On service-related expenses |
| Exemptions & Zero-rated Items | More common (e.g., some foodstuffs) | Some exemptions exist |
| Inventory Management Impact | VAT affects stock valuation | Less impact on inventory |
Why This Matters
Understanding how VAT applies to your business type helps you:
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Calculate prices correctly
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Manage cash flow efficiently
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Prepare accurate VAT returns
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Avoid unnecessary penalties
Need Help with VAT Compliance?
Whether you run a product or service business, we provide expert tax consulting to simplify VAT registration, filing, and management.
📍 Biashara Plaza, Moi Avenue, Nairobi
📧 info@blueoceanoutsource.co.ke
📞 +254 729 842 847
Get in touch today for tailored VAT solutions.
