A KES 3,000 sale is not KES 3,000 of revenue, and the gap is bigger than most first-year merchants budget for. Between the number on your product page and the money in your account sit five deductions — and one of them, VAT, arrives suddenly at a threshold rather than gradually.
This is the arithmetic, plus the KRA thresholds that change it. Tax figures are from KRA's published guidance; anything about your specific position belongs with an accountant.
Skip to: The VAT threshold · eTIMS · Inclusive or exclusive? · What a sale actually loses · A worked example
The VAT threshold, and the day it arrives
You must register for VAT within 30 days of annual turnover reaching or exceeding KES 5 million. Below that it is voluntary. The standard rate is 16%, and both the return and the payment are due on or before the 20th of the following month.
Failure to register when required carries a penalty of KES 20,000 or double the tax due, whichever is higher. Note the structure: the longer you trade past the threshold unregistered, the more the second figure grows, and the penalty follows it.
Two things merchants get caught by:
- It is turnover, not profit. A shop doing KES 5.2 million in sales on thin margins is over the line even if it barely made money. The test does not care what you kept.
- Non-resident digital sellers have no threshold. If you supply into Kenya over the internet or through a digital marketplace from outside the country, you must register regardless of turnover. Incorporating abroad does not help — the same pattern as the Data Protection Act, which also reaches non-Kenyan companies serving Kenyan customers.
Worth noticing that KES 5 million is the same number as the ODPC data-controller threshold. A shop crossing KES 5 million in a year likely acquires both obligations in the same quarter, and they are easier to handle together than discovered separately.
Registering voluntarily — when it pays
You can register below the threshold, and it lets you claim input VAT on your purchases. Whether that is worth it turns on who buys from you.
Usually not worth it for a consumer shop. You either add 16% to your prices — making you visibly more expensive than an unregistered competitor — or absorb it out of margin. Against that you recover input VAT on stock and services, and take on monthly filing plus eTIMS. For most B2C merchants under the threshold the compliance cost exceeds the recovery.
Often worth it for B2B. If your customers are VAT-registered businesses, they reclaim the VAT you charge, so it is not a real price increase to them — and you recover your own input VAT. Here registration is closer to free.
eTIMS: what changes once you are registered
Every VAT-registered business in Kenya must issue invoices through a compliant electronic tax register or through eTIMS, KRA's electronic tax invoice system. There is no sector exemption — retailers, service providers, distributors, all of it.
For an online shop that means your invoicing has to produce compliant electronic tax invoices, not just order confirmation emails. Two practical consequences:
- Order confirmations are not tax invoices. They serve different purposes and satisfying one does not satisfy the other.
- Plan it before you cross the threshold. Retrofitting compliant invoicing while also filing your first VAT return is a bad month. If you can see KES 5 million coming, get the invoicing question answered while you are still under it.
Inclusive or exclusive pricing?
Consumer shop: display VAT-inclusive. Kenyan shoppers expect the number on the page to be the number they pay. Adding 16% at checkout is among the more reliable ways to lose a cart — the same reason passing gateway fees to customers converts badly.
B2B: exclusive is fine. Business buyers are used to seeing prices before tax and reclaim it anyway.
If you are approaching the threshold, price as though you are already registered. Building 16% into your prices before you need to is far easier than raising every price the month you register — and it means the transition is invisible to customers rather than a 16% jump they notice.
What a sale actually loses
Five deductions, in rough order of size for a typical Kenyan shop:
- Cost of goods. Yours to know. Everything below assumes you already have.
- VAT, if registered. 16%, and it was never your money — a common and expensive misreading of a healthy-looking bank balance.
- Delivery, to the extent you subsidise it. Free shipping is a marketing cost dressed as a logistics one. See the delivery guide.
- The payment fee, where a gateway is involved. Published Kenyan M-Pesa gateway rates run 1.5-3.5% by provider. Pay-to-Till with no gateway is roughly 0.5%, capped at KES 200 — see the gateway comparison.
- The returns reserve. 1-8% of revenue by category, fashion at the top. Not a bill, which is exactly why it gets missed.
A worked example
A fashion item listed at KES 3,000, product cost KES 1,200, delivered in Nairobi with KES 200 charged to the customer against KES 300 actual cost. Shop is VAT-registered and takes payment through a gateway at 2.9%.
| Line | Amount | Note |
|---|---|---|
| Customer pays | KES 3,200 | Item + KES 200 delivery |
| Less VAT (16% of 3,000) | −KES 414 | VAT-inclusive price; never your money |
| Less gateway fee (2.9%) | −KES 93 | ~KES 18 on Pay-to-Till instead |
| Less cost of goods | −KES 1,200 | |
| Less delivery shortfall | −KES 100 | Cost 300, charged 200 |
| Less returns reserve (5%) | −KES 160 | Fashion sits high on the range |
| Kept | ~KES 1,233 | ~39% of what the customer paid |
Two things stand out. The item looked like a 60% margin — KES 3,000 against KES 1,200 of goods — and it is closer to 39% once everything lands. And the two smallest lines, the gateway fee and the delivery shortfall, are the two you can move fastest: Pay-to-Till instead of a gateway saves KES 75 here, and charging delivery accurately saves KES 100. Together that is KES 175 a sale, or about 14% more profit, with no price increase and no new customers.
Which is the general point. Most Kenyan shops looking to improve margin reach for price increases or ad spend. The deductions above are usually the cheaper lever, because fixing them costs nothing and does not risk conversion.
The short version
- VAT registration is mandatory within 30 days of KES 5M turnover. 16%, filed by the 20th.
- Penalty for not registering: KES 20,000 or double the tax due, whichever is higher.
- It is turnover, not profit — thin margins do not exempt you.
- Non-resident digital sellers into Kenya have no threshold at all.
- VAT-registered means eTIMS. Order confirmations are not tax invoices.
- Consumer shops: display VAT-inclusive. Price as if registered before you are.
- Five deductions turn an apparent 60% margin into roughly 39%.
- The gateway fee and delivery shortfall are the cheapest two to fix.
For the full launch budget, see the first-year cost breakdown. Tax figures verified against KRA published guidance, August 2026. This is general information, not tax advice — thresholds and rules change, and your position may differ. Talk to a Kenyan accountant before acting on any of it.