The Kenya Revenue Authority (KRA) has secured a major victory in court after Appeal Court judges reversed a High Court declaration that Value Added Tax (VAT) is not payable on transactions for the sale or purchase of land and buildings, whether commercial or residential.
The Court of Appeal said on Friday that there was no ambiguity in the tax laws and that the supply of commercial premises was not exempt from VAT.
In the precedent-setting ruling, the judges also set aside a High Court order to KRA to refund a property buyer, Mr David Ndegwa, Sh11.2 million paid as VAT.
Mr Ndegwa was compelled by KRA to pay the amount after purchasing land in Kiambu town with a building constructed on it.
After buying the property from Standard Chartered Bank Kenya Ltd at a cost of Sh70 million in 2013, the taxman demanded Sh11.2 million as VAT at the rate of 16 percent of the purchase price.
This triggered the legal battle, which Mr Ndegwa won at the High Court in the judgment delivered in November 2018.
The verdict of the Court of Appeal puts an end to uncertainty in the property conveyance sector in relation to VAT levies on property sales.
There had been confusion as to whether the value of the land and the value of the buildings should be considered separately in the sale of a property comprising both land and commercial buildings.
The High Court's decision had far-reaching implications, as many taxpayers had paid VAT on the purchase of commercial premises and would therefore have claimed a refund.
"We are satisfied that there is no ambiguity in Paragraph 8 of Part II of the First Schedule to the VAT Act and that the High Court erred in finding and holding otherwise. The supply of commercial premises is not exempt from VAT and the said provision of the law is not vitiated by any ambiguity," said Court of Appeal justices Kathurima M'Inoti, Francis Tuiyott and Fred Ochieng.
The KRA had insisted that both the land and the buildings on it cannot be separated and the taxable value is the financial amount indicated in the sale agreement.
The High Court had held that since the sale of land is exempt from VAT, it follows that the sale of commercial buildings developed on the land subject to the transaction, whether commercial or residential, is also exempt.
The basis for this finding was the First Schedule to the VAT Act 2013, Part II, paragraph 8, which provides for exempt supplies as the “supply by way of sale, renting, leasing, hiring, letting of land or residential premises”.
For its part, KRA argued that VAT was payable and was lawfully levied on Mr Ndegwa’s transaction pursuant to the provisions of the VAT laws.
KRA submitted that land and buildings have separate and distinct meanings. It said that land is as defined in Section 260 of the Constitution, while buildings are defined as any structure of any kind, whether permanent or temporary, moveable or immoveable and whether complete or incomplete.
On the issue of ambiguity in the law, the KRA stated that there was no ambiguity because the VAT Act, as an exemption statute, does not exempt commercial buildings from VAT. It was argued that the Act treats land and buildings as different VATable goods.
