Executive summary

In David Mwangi Ndegwa (Respondent) v. Kenya Revenue Authority (Appellant) (KRA), Civil Appeal No. 65 of 2019, the Court of Appeal (the Court), on 21 March 2025, ruled that the sale of commercial property is subject to value-added tax (VAT) at the standard rate of 16%.

Background

In 2013, the Respondent purchased land, together with all buildings erected on it, from a local financial institution. The KRA demanded 11.2m Kenyan Shillings (KES), representing 16% VAT on the purchase price. The Respondent paid the VAT under protest and filed suit in the High Court seeking a refund, arguing that the purchase transaction was VAT-exempt. The High Court ruled in favor of the Respondent. Dissatisfied with the decision, the KRA appealed to the Court of Appeal.

Facts of the case

The question at issue was whether the VAT exemption on land under Paragraph 8 of Part II of the First Schedule to the VAT Act, 2013, also extends to buildings, whether residential and commercial, erected on the land.

The Respondent argued that the sale of land, including buildings thereon, should be exempt from VAT based on Paragraph 8 of Part II of the First Schedule to the VAT Act. Additionally, the Respondent contended that the VAT Act provision was ambiguous and should be interpreted in the taxpayer's favor.

The High Court concurred with the Respondent that the VAT exemption applicable to land encompasses buildings situated on that land. In reaching its decision, the High Court relied on Article 260 of the Constitution, which defines "land" to include the "surface of the earth, subsurface rock, water bodies, marine waters, natural resources, and the air space above." Consequently, the High Court ordered the KRA to refund the VAT that the Respondent had paid.

On appeal, the KRA argued that the VAT exemption as provided under Paragraph 8 of Part II of the First Schedule to the VAT Act is clear and specifically applies to the supply of land and residential premises.

Analysis and determination

The Court of Appeal referenced the Land Act, 2012, affirming that "land" and "buildings" are distinct terms. It further strictly relied on Article 260 of the Constitution and concluded that the definition of land was not exhaustive and was thus not intended for all situations and contexts.

The Court of Appeal noted that the VAT Act clearly distinguishes between land and buildings, and between residential and commercial premises and therefore held that the VAT exemption under Paragraph 8 of the First Schedule to the VAT Act clearly applies only to land and residential premises, thereby excluding commercial premises.

In conclusion, the Court of Appeal ruled that the High Court erred in concluding that the exemption of land provided for in the VAT Act included commercial premises. Commercial premises should therefore subject to VAT at 16%.

Implications

The judgment clarifies that, unless a supply is explicitly exempt from VAT under the First Schedule of the VAT Act, it is subject to VAT. Consequently, retrospective VAT refund claims based on the High Court ruling are no longer valid.