Value Added Tax (VAT) on transactions for the sale or purchase of land and buildings whether commercial or residential: The Case of Kenya Revenue Authority v. David Mwangi Ndegwa (Civil Appeal No. 65 of 2019)

Background

The Kenya Revenue Authority has secured a major victory in court after Appeal judges reversed a High Court’s 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 appeals court on Friday said there was no ambiguity in tax laws and that supply of commercial premises is not exempted from VAT.

In the precedent-setting verdict, the judges also set aside a High Court’s order to Kenya Revenue Authority (KRA) to refund a property buyer, Mr David Ndegwa, Sh11.2 million paid as VAT taxes.

Mr Ndegwa was compelled by KRA to pay the amount after purchasing land in Kiambu town together with the building erected on it.

Upon purchasing the property from Standard Chartered Bank Kenya Ltd in 2013 at a cost of Sh70 million, the taxman demanded a sum of Sh11.2 million on account of Value Added Tax (VAT) at the rate of 16 per cent of the purchase price.

This triggered the legal dispute, where Mr Ndegwa won at the High Court in the judgement delivered in November 2018.

Brief Facts

The case stemmed from a 2013 transaction where David Ndegwa purchased a commercial property from Standard Chartered Bank for Kshs 70 million and VAT of Kes 11 million was charged, which Ndegwa paid under protest. He then applied for refund and sued KRA, 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 (Kasango, J.), in its judgment delivered in 2018 held that the the term 'land' as used in the provision and defined in the Constitution includes 'what is on the surface of the earth and the airspace above the surface' including property on the land, whether commercial or residential. The HC 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 KRA obtained a stay of execution and appealed the decision to the Court of Appeal, which is the subject of this judgment. The KRA asserted that the exemption applied only to land (vacant land) and residential premises, not commercial premises.

The CoA, 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.

 Analysis:

 At the Court of Appeal, the main issues the court considered were whether the term "land" in the VAT Act includes buildings, and if so, whether VAT should be charged on the sale of land with buildings (residential or commercial), the implications of the specific mention of "residential premises" in the VAT Act and the exclusion of "commercial premises’’.

The court focused on interpretation of Paragraph 8 of Part II of the First Schedule to the VAT Act, which exempts from VAT the 'supply by way of sale, renting, leasing, hiring, letting of land or residential premises.' The provision defines 'residential premises' as 'land or a building occupied or capable of being occupied as a residence', excluding hotels or holiday accommodations. The court's reasoning was as follows:

1. Distinct terms: The use of 'land' and 'residential premises' as separate categories in the provision indicates that they are not synonymous. The legislature deliberately listed them distinctly, suggesting different scopes of exemption.

2. Clarity of language: The provision’s separation of 'land' and 'residential premises', with a specific definition for the latter, left no room for confusion. 'Land' meant vacant land, and 'residential premises' meant buildings used as residences. Commercial premises fell outside both.

3. Exclusion of commercial premises: By expressly mentioning 'residential premises' and defining it, while omitting 'commercial premises,' the court applied the maxim expressio unius est exclusio alterius (the express mention of one thing excludes others). This implied that commercial premises were not exempt and thus subject to VAT.

4. Legislative intent: The court emphasized that the VAT Act, as an exemption statute, only excludes what is explicitly listed. Since commercial premises were not included, the intention was to tax them.

5. Contextual limitation: Article 260 of the Constitution begins with 'unless the context requires otherwise,' meaning its definition applies only when suitable. The VAT Act’s specific context on tax exemptions allowed a narrower definition of 'land' excluding buildings, unless specified.

6. Statutory autonomy: The court held that the legislature can define terms differently in specific laws (e.g., VAT Act) without adhering strictly to the Constitution’s broad definition. For example, the Mining Act excludes 'minerals' from the definition of 'land'.

The court further referred to the VAT Act’s history (from 2006 onward), noting that earlier versions exempted land, residential, and non-residential buildings, but by 2013, only 'land' and 'residential premises' remained exempt. This evolution showed a deliberate shift to tax commercial premises.

Court's Determination:

The Court of Appeal began by defining land within the context of the VAT Act, 2013 and disagreed with the High Court’s interpretation. The High Court had held that the term “land” included buildings, both residential and commercial, and thus exempted them from VAT. However, the Court of Appeal clarified that the VAT Act’s definition of land must be applied within the context of the Act itself, not the broader definition provided in Article 260 of the Constitution. It rejected the High Court’s interpretation that all buildings on land, whether residential or commercial, are automatically exempt from VAT by virtue of being on land as defined by the Constitution.

The Court of Appeal also examined the VAT exemptions under the VAT Act, emphasizing that the Act is an exemption statute. As such, only supplies explicitly exempted by the Act are free from VAT. The Court reaffirmed that land and residential premises are the only categories that benefit from VAT exemptions under the Act. The exemption does not extend to commercial premises, which are not covered by the exemptions and remain subject to VAT.

In conclusion, the Court of Appeal held that the High Court had erred in its interpretation. It reaffirmed that VAT applies to commercial premises and that the exemptions under the VAT Act are limited to land and residential premises only. The appeal was allowed, and the respondent was not entitled to a VAT refund.

However, the Court did not address the applicability of VAT on mixed-use premises and it was not part of the issues before the court. It left room for future litigation where this specific question could be raised.

Conclusion/jurisprudential Implications

The judgment provides much-needed clarity in Kenya’s tax laws, especially for real estate developers, businesses, and legal practitioners, regarding the VAT treatment of residential versus commercial premises. It is now settled that VAT is applicable on sale, renting, leasing, hiring or letting of commercial premises, subject to an appeal that may be filed at the Supreme Court. Businesses and individuals involved in commercial real estate transactions should now be aware that VAT is chargeable on commercial properties.

Conclusively, the verdict of the Appeals Court brings to end uncertainty in property conveyance sector in relation to VAT levies on property disposals.