Withholding on goods supplied to public entities
The withholding tax a Kenyan public entity deducts when it pays for goods, how the supplier claims it in the annual return, and how to record it.
By Achekam · · 4 min read · For Running a business businesses in Kenya
Winning a supply contract with a county government, a state corporation or a public hospital feels like the hard part. Then the first payment arrives and it is short. Not by much, but enough that the receivables clerk cannot match it to the invoice, and the sales team wants to know whether the customer has made a mistake.
Usually the customer has done exactly what the law expects. When a public entity pays for goods, it withholds a slice of the payment as tax and passes it to KRA. For a resident supplier that slice is not lost: it is tax already paid on the supplier's behalf, to be claimed back through the annual return. This article explains the rates, the certificate that proves the deduction, how to claim it, and how to keep your receivables straight while you do.
The rates for residents and non-residents
KRA's withholding tax FAQ lists withholding on the supply of goods to a public entity at 0.5% for residents and 5% for non-residents, at the time of writing.
For a Kenyan resident supplier, 0.5% of each payment is small on a single invoice, but on a large contract or a stream of deliveries it adds up. A non-resident supplier faces ten times the resident rate. KRA's frequently asked questions on withholding tax list this rate with the others and explain how withholding works from both sides, and are worth reading before you tender.
Net payment and the certificate
KRA describes the mechanics simply. The withholder pays the recipient the amount net of the tax deducted, and a withholding tax certificate is issued to the recipient as evidence once the tax is remitted to KRA.
Two things follow for the supplier:
- The cash you receive is the invoice amount less the withholding. That is expected, not a short payment to chase as a debt.
- The certificate is your proof. It appears once the public entity has remitted the tax to KRA, not at the moment you are paid. If it does not appear, the deduction is not yet credited to you, and you need to follow it up. How to do that is covered in chasing a missing withholding tax certificate.
A customer that is an appointed withholding VAT agent may also withhold VAT, which KRA says is charged at 2% of the value of taxable supplies. That is a separate deduction with its own rules, explained in when a customer withholds VAT from your payment.
Claiming it in the annual return
For resident suppliers, the withholding is a payment on account rather than a final tax. KRA says that for most payments to residents, withholding tax is not final: the payee must declare the income and the withholding certificates in its annual return and pay any balance.
A worked example in words: a resident company supplies stationery to a ministry throughout the year. Each payment comes in net of 0.5%. At year-end, the company declares the full sales in its income tax return, including the gross amount of every government invoice, and lists the withholding certificates it received. The tax already withheld counts towards its liability, and it pays only the balance.
The claim works only with certificates in hand. A deduction with no certificate is hard to claim, which is why chasing them during the year matters more than it seems.
For non-residents with no permanent establishment in Kenya, KRA says withholding tax is a final tax, so there is no return in which to claim it.
Tax compliance certificates for tenders
Government work brings a second tax document into play. KRA says a Tax Compliance Certificate is required when, among other things, applying for a government tender. Its list also includes renewing a work permit, applying for a clearing and forwarding agent's licence or a liquor store licence, and being offered a job.
A supplier whose tax affairs are not in order may not get past the tender stage, let alone reach the point of being paid net of withholding. Keep the certificate current all year. The requirements are covered in Kenya's tax compliance certificate.
Recording short receipts in Achekam
In Achekam, a business records customer payments against one invoice or spread across a customer's invoices. A part payment leaves the invoice part-paid, and anything extra is held on the customer's account. A receipt can be re-allocated later, and administrators can refund or reverse one.
There is a limit you should know about. When a customer pays net of withholding tax, Achekam's receipt screens cannot settle the withheld part of the invoice. Record the cash actually received as a receipt against the invoice; the invoice then shows as part-paid, with the withheld amount still open. Keep the withholding certificate with that invoice when it arrives, and agree with your accountant how the open withheld balance is cleared in your books, so that your receivables do not overstate what customers owe.
Pricing government contracts
Withholding does not change the price, but it changes the cash. Before you bid:
- Work out how much will be withheld across the contract at the resident or non-resident rate.
- Check that your cash flow can carry the gap until the withholding is used against your annual tax.
- Confirm your tax compliance certificate is valid for the tender period.
- Agree internally who will collect certificates from the public entity after each payment.
- Make sure your receivables team knows the payments will arrive net, so they do not chase the difference as a debt.
Before your next delivery to a public entity, set up a simple register of invoices, amounts received and certificates outstanding. It is the record you will need at year-end.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
