Introduction
A recent key decision by the Court of Appeal in Kenya Revenue Authority v Ndegwa (Civil Appeal 65 of 2019) has provided important clarity on Value Added Tax (VAT) for property transactions.
Here’s what you need to know. What Was the Case About?
The core issue was whether VAT should be charged on the sale of commercial buildings. A buyer (Mr. Ndegwa) purchased a commercial property and was charged VAT by the Kenya Revenue Authority (KRA). Mr. Ndegwa paid the demanded VAT under protest and then approached the High Court seeking a refund, arguing that the sale of land, including any buildings on it (whether residential or commercial), should be exempt from VAT based on their interpretation of the VAT Act 2013 and the constitutional definition of land.
The High Court ruled in favor of Ndegwa, stating that VAT was not chargeable on the sale of land, whether the premises were residential or commercial, and ordered the KRA to refund the VAT.
KRA appealed this decision, arguing that the High Court misinterpreted the VAT Act.
Court of Appeal Analysis and Decision:
The Court of Appeal overturned the High Court’s ruling. The final decision confirmed that VAT is applicable on the sale of commercial premises. Why? The Court’s Reasoning Explained Simply
- On the Definition of Land: The Court of Appeal disagreed with the High Court’s interpretation. It emphasized that the definition of “land” in Article 260 of the Constitution applies only when the context requires it. The court argued that the VAT Act provides its own context-specific definition, which differentiates between “land” and “buildings.” The court stated that the legislature is permitted to define “land” differently in different statutes.
- On the Ambiguity of the VAT Act: The Court of Appeal found that paragraph 8 of Part II of the First Schedule to the VAT Act, 2013, is not ambiguous. The court noted that the Act specifically exempts “land” and “residential premises” from VAT, but does not exempt “commercial premises.” The court applied the principle that if something isn’t specifically listed as exempt in tax law, it is generally considered taxable.
- Land vs. Buildings in Tax Law: While the Constitution has a broad definition of “land” (including the surface, subsurface, and airspace), the Court emphasized that tax laws, like the VAT Act, often treat land and buildings distinctly for taxation purposes. The specific wording in the VAT Act’s exemption list took precedence in this tax context.
What This Means for You (Our Clients): Buying/Selling Commercial Property:
If you are involved in buying or selling property that includes commercial buildings (like office blocks, retail shops, warehouses, etc.), VAT will likely be applicable to the value attributed to the buildings and improvements. The land component itself generally remains exempt.
Transaction Structuring: Understanding this distinction is vital when structuring deals and calculating final costs. The value of the commercial building needs to be determined for VAT calculation.
Residential Property: The ruling reinforces that the sale of land and residential premises remains exempt from VAT under the current law.
Seek Professional Advice: Tax laws can be complex. We always recommend seeking professional tax advice specific to your transaction to ensure compliance and accurate cost assessment.
Conclusion
This Court of Appeal judgment provides important clarity for the real estate sector. It confirms the KRA’s position that VAT applies to the sale of commercial buildings. As your trusted real estate partner in Nanyuki and beyond, we believe keeping you informed helps you make sound investment decisions.
*Disclaimer: This article provides general information and does not constitute legal or tax advice. Please consult with qualified professionals for advice tailored to your specific situation
