Value Added Tax (“VAT”), which is a Consumption Tax that is ultimately paid by the Consumer, is generally the easiest form of Tax that is collectable. However, due to the domineering influence of the informal sector of the economy, most of whose transactions are not documented, collecting VAT in developing countries remains challenging, encouraging Tax Evasion.
2.0 Analysis
2.0 Analysis
Case : David Mwangi Ndegwa v Kenya Revenue Authority [2018] eKLR
Leases and Rental of Residential Accommodation by Individual Persons only is now added to the List of Services exempted from VAT invoicing and remittances.
Some of the issues in contention were the determination of whether there is a legal distinction between the treatment of land vis-à-vis buildings and whether the law exempts sale of land from tax. The argument in this instance was whether the law exempts a sale of land from tax, and only tax a sale of the property standing on the said land. This would then beg the question; would it be possible to sell a building without selling the land?
This dispute arose when the taxpayer bought a parcel of land on 11th December 2013 from Standard Chartered Bank Kenya but the Seller’s advocate was unwilling to complete the transaction unless the taxpayer paid VAT of Kshs 11 Million. The taxpayer was of the opinion that VAT is not payable on transactions for the sale or purchase of land, irrespective of the type of buildings standing thereon (residential or commercial). He however paid the VAT in order to complete the transaction and went on to seek a refund from KRA unsuccessfully. He then filed a suit seeking judgement from the High Court on whether he was obligated to pay VAT on the transaction. This would necessitate a refund from KRA for the VAT he paid together with interest at court rates.
3.0 Holding:
"38. In the end I grand the following orders:
High Court declared VAT not applicable on the sale or purchase of land irrespective of the nature of buildings situated thereon.
The Value Added Tax (VAT) is not applicable to transactions for the sale or purchase of land. The Court further noted that for VAT purposes, it is immaterial whether the buildings situated on the land are residential or commercial.
"38. In the end I grand the following orders:
a) A declaration is hereby made that Value Added Tax is not payable on transaction for the sale or purchase of land whether or not the building thereon are residential or commercial buildings. "
4.0 Conclusion
VAT on Commercial Property is not applicable.
High Court declared VAT not applicable on the sale or purchase of land irrespective of the nature of buildings situated thereon.
The Value Added Tax (VAT) is not applicable to transactions for the sale or purchase of land. The Court further noted that for VAT purposes, it is immaterial whether the buildings situated on the land are residential or commercial.
The Court agreed with the Plaintiff’s argument that the definition of land in the Constitution applies to what is on the surface of the earth and the airspace above it and therefore the exemption in the VAT Act applies to all land, both with commercial and residential properties. The Defendant, KRA was also directed to refund the sums that the Plaintiff had paid as VAT.
This judgement means that moving forward, KRA can no longer charge VAT on the sale or purchase of commercial properties. The learned Judge also urged KRA to clarify from the legislature on which supplies were exempt from VAT in order to remove the ambiguity which had led to this suit.
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