Summary Of Facts
In 2013 Mr. David Ndegwa bought a commercial property from Standard Chartered Bank for Kshs 70 million. The Kenya Revenue Authority demanded that he pay VAT at a rate of 16% on the purchase price (Kshs 11million). He paid the said amount but did so under protest. He sued KRA at the High Court, arguing that Paragraph 8 of Part II of the First Schedule to the VAT Act exempted the sale of land, including buildings on it, whether residential or commercial, from VAT. The High Court ruled in favor of Ndegwa that VAT is not applicable on the sale of commercial property and was entitled to a refund of the VAT paid. The High Court held that the relevant provision of the VAT Act was unclear. It held that the sale and purchase of land, whether the buildings on it were residential or commercial, were exempt from VAT. KRA appealed to the Court of Appeal.
Issue for Determination before the Court of Appeal
Whether “land” in the VAT Act includes buildings and the implications for VAT on land with buildings
Issue 1: Whether “land” in the VAT Act includes buildings and the implications for VAT on land with buildings
The Court of Appeal while interpreting Paragraph 8 of Part II of the First Schedule to the VAT Act, held that the use of ‘land’ and ‘residential premises’ as separate categories in the provision indicates that they are not synonymous. The Court clarified that VAT exemptions apply only to land and residential premises, not commercial premises. The Court further concluded that the High Court erred, affirming that VAT applies to commercial premises.
Final Determination of the Court
The Court of Appeal, in a unanimous decision, overturned the High Court decision, holding that Paragraph 8 of Part II of the First Schedule to the VAT Act does not exempt supply by way of sale, renting, leasing, hiring, letting of commercial premises from VAT.
Conclusion
This decision reinforces the principle that any item not expressly exempted under the VAT Act is subject to VAT. Since the Act only exempts the supply of land and residential premises, all transactions involving commercial properties, such as sales, transfers, and leases, are subject to VAT at the standard rate of 16%. As a result, VAT must be factored into the pricing and structuring of commercial property transactions in Kenya.
