Turnover Tax or VAT?

Preface

You are growing. Revenue is climbing. Customers are coming back. And somewhere between KSh 3 million and KSh 8 million in annual sales, you hit a wall that has nothing to do with your product, your market, or your hustle.

The wall is a tax decision. And most Kenyan businesses get it wrong.

Turnover tax (TOT) is 3% of everything you earn. Simple. No deductions, no input claims, no complicated accounting. The Kenya Revenue Authority (KRA) designed it for small businesses — pay 3%, file monthly, move on with your life.

VAT is 16% on your taxable supplies. But you can claim back the VAT you paid on your business purchases. It requires more paperwork, more compliance, and more interaction with KRA. But for businesses with significant expenses, it can mean paying less tax overall than the "simple" 3%.

The threshold sits at KSh 5 million in annual taxable supplies. Cross it and VAT registration becomes mandatory. But even below that line, some businesses would save money by voluntarily registering for VAT. Others would lose money by switching too early.

This book exists because nobody explains the math. Your accountant might tell you what to do. This book shows you why — with actual numbers, actual scenarios, and the actual KRA rules.

Who This Book Is For

• Business owners earning KSh 2 million to KSh 10 million per year who need to decide between TOT and VAT — or who are about to be forced into VAT
• Anyone currently on TOT who suspects they might save money on VAT but is not sure
• Anyone recently registered for VAT who is drowning in compliance and wondering if they made a mistake
• Side hustlers approaching the KSh 5 million threshold who want to plan ahead instead of scrambling

What You Will Walk Away With

By the last page, you will know exactly which regime saves you money based on your specific revenue, expenses, and business type. You will have a switching timeline if you need one, a compliance checklist for whichever regime you choose, and the confidence to make this decision yourself — not just trust whoever happens to be doing your books.

This is a companion to KRA vs. You: The Insider Playbook for Legally Paying Less Tax in Kenya. That book covers the full Kenyan tax landscape. This one zooms in on the single decision that trips up more growing businesses than any other.

Let us do the math.

The Decision That Costs You Money

Mama Njeri runs a catering business in Thika. Weddings, corporate events, funerals — she handles them all. Four staff, a rented commercial kitchen, a Toyota Townace for deliveries. Revenue last year: KSh 6.2 million.

Her accountant told her to stay on turnover tax (TOT) — the simplified 1.5% tax on gross sales for businesses under KSh 25 million per year. "Less headache," he said. "You just pay 1.5% and move on." So she did. She paid KSh 93,000 in turnover tax for the year.

Njeri's friend Grace runs a similar catering operation in Ruiru. Revenue: KSh 5.8 million. Grace's accountant ran the numbers differently. Grace registered for VAT (Value Added Tax) — voluntarily, even though her revenue was just above the KSh 5 million mandatory threshold. She charges her clients 16% VAT on top of her prices. But she also claims back the VAT she pays on ingredients, cooking gas, kitchen equipment, packaging, and vehicle maintenance.

Grace's net VAT payment for the year — the amount she actually sent to KRA after subtracting her input VAT claims — was KSh 94,000.

Same industry. Similar revenue. One paid KSh 93,000 to KRA. The other paid KSh 94,000.

At this revenue level, the difference is small. But that changes as revenue grows, as input costs shift, and as the mandatory VAT threshold approaches. The point is this: Njeri's accountant never ran the numbers. He defaulted to "simple" without checking whether simple was also cheaper. At different margins, the difference can be hundreds of thousands of shillings.

Here is what Njeri did not know — and what this book will teach you.

What You Will Learn

• Identify the two tax regimes available to your business (TOT and VAT) and explain what each one costs
• Describe the specific conditions that make one regime cheaper than the other
• Calculate — with actual numbers — which regime saves you money right now
• Recognize when you are approaching the mandatory VAT threshold and what to do about it
• Make this decision yourself, with confidence, instead of blindly trusting your accountant

Why This Matters

Between KSh 2 million and KSh 10 million in annual revenue, every growing Kenyan business faces the same question: do I stay on turnover tax, or do I register for VAT?

Get it right and you keep more of what you earn. Get it wrong and you either overpay — like Njeri — or you trigger Kenya Revenue Authority (KRA) attention by missing the mandatory registration threshold.

Both mistakes are expensive. Both are avoidable. Both come down to math that most accountants never bother to show you.

This book exists because of that math. Not theory. Not opinion. Numbers.

The Two Regimes — A Quick Overview

Before we go deep (Chapters 2 and 3 do that), here is the high-level picture.

Turnover Tax (TOT)

TOT is KRA's simplified tax for small businesses. The deal is straightforward:

• Rate: 1.5% of gross sales
• Who qualifies: Businesses with annual revenue between KSh 1 million and KSh 25 million
• How it works: You calculate 1.5% of your total monthly sales and pay it to KRA by the 20th of the following month
• What you cannot do: Claim deductions. Offset expenses. Recover input VAT. The 1.5% applies to revenue, not profit.

TOT is a flat percentage of everything you earn. If your revenue is KSh 500,000 per month, you pay KSh 15,000 in TOT. It does not matter whether your profit that month was KSh 200,000 or KSh 20,000.

Last verified: March 2026. Check the KRA website (kra.go.ke) for current rates and thresholds.

VAT (Value Added Tax)

VAT is a 16% tax on taxable goods and services. It is more complex than TOT but works differently:

• Rate: 16% (standard rate)
• Who must register: Businesses with annual taxable supplies above KSh 5 million
• How it works: You charge 16% on your sales (output VAT), claim back the 16% on your business purchases (input VAT), and remit the difference to KRA
• The advantage: If your business has significant expenses that carry VAT, you can recover that VAT — potentially paying much less than 1.5% of revenue

The key insight: TOT taxes your revenue. VAT effectively taxes only the value you add. For businesses with high costs of goods sold — retailers, manufacturers, caterers buying ingredients — the difference can be massive.

For a full explanation of how VAT works, including zero-rated and exempt supplies, see Chapter 3.

The Two Mistakes Growing Businesses Make

Mistake 1: Staying on TOT When VAT Would Save You Money

This is Njeri's mistake. Her catering business spends heavily on ingredients, gas, packaging, and equipment. All of those purchases carry VAT — 16% built into every price she pays. On TOT, that VAT is a pure cost. She pays it but cannot recover it.

On VAT, she would charge her clients 16% on top of her prices AND claim back the 16% she pays on purchases. The net amount she remits to KRA could be much less than 1.5% of revenue — because most of her revenue goes straight back out as expenses.