VAT Input Tax Recovery on Certain Exempt Supplies

What Has Changed?

The Finance Act, 2026 amended Section 17 of the VAT Act to allow recovery of input VAT directly attributable to certain exempt supplies made to specified government security agencies.

Previously, input VAT relating to exempt supplies was generally irrecoverable.

Which Supplies Qualify?

The exception applies to qualifying supplies made to:

• Kenya Defence Forces (KDF).
• Defence Forces Welfare Services (DEFWES).
• National Intelligence Service (NIS).
• National Police Service (NPS).

These supplies must fall under the specified exemptions in paragraphs 57 and 101 of the First Schedule to the VAT Act.

What Do Paragraphs 57 and 101 Cover?

How Does the Recovery Work?

A registered person supplying these qualifying exempt goods can now deduct the input VAT incurred in making those supplies, provided that:

• The required documentation prescribed by the Commissioner is maintained.
• The input VAT is directly attributable to the qualifying supplies.
• Where the input VAT is wholly attributable to these supplies, it is not subject to apportionment under Section 17(5).

What Does This Mean?

This does not mean that input VAT on all exempt supplies can now be claimed. The supply must fall within the specified exemptions, and the documentation and direct-attribution requirements must be met.