The Court of Appeal recently delivered a judgment in the case of Kenya Revenue Authority v Ndegwa (Civil Appeal 65 of 2019) [2025] KECA 510 (KLR) (21 March 2025) clarifying that Value Added Tax (VAT) is applicable to the sale of commercial property. The Court of Appeal overturned the High Court decision in David Mwangi Ndegwa v Kenya Revenue Authority [2018] KEHC 9770 (KLR) which had held that VAT is not payable on the sale of commercial property.
Background
On 11th December 2013 David Mwangi Ndegwa (the Respondent) purchased a property in Kiambu from Standard Chartered Bank Kenya Ltd. Standard Chartered Bank sold the property together with all the building erected on it for Kshs. 70,000,050.00. The Kenya Revenue Authority (KRA) demanded VAT of 16% amounting to Kshs.11,200,080.00 which the Respondent paid under protest.
In October 2015, Mr. Ndegwa filed a suit seeking a declaration that no VAT was payable on the sale or purchase of land whether the buildings erected on it were residential or commercial and an order for refund of the VAT that he had paid. The claim was based on his contention that no VAT was chargeable under Paragraph 8 of Part II of the First Schedule to the Value Added Tax Act, No. 35 of 2013 (VAT Act) on a transaction like the one he had been involved in.
The KRA filed a defence, arguing that the VAT exemption only applies to land and residential premises and not commercial property.
High Court decision
The High Court, on 29th November 2018, held that VAT was not payable on transactions involving the sale or purchase of land, whether residential or commercial. The Court accordingly ordered KRA to refund the VAT Mr. Ndegwa had paid for the purchase of commercial premises from Standard Chartered Bank.
The High Court in agreement with Mr. Ndegwa, held that the supply that was exempt from VAT under paragraph 8 of Part II of the First Schedule was land and residential premises. The Court elaborated that according to Article 260 of the Constitution of Kenya, 2010 “land” include what is on the surface of the earth and the airspace above the surface thus Mr. Ndegwa’s transaction was exempt from Paragraph 8 of Part II of the First Schedule of the VAT Act. The court also found that Paragraph 8 of Part II of the First Schedule was ambiguous in light of the definition of land in the Constitution. The court further ordered KRA to refund the Kshs. 11,200,080.00 paid by Mr. Ndegwa as VAT.
Court of Appeal decision
Aggrieved with the decision, the KRA appealed the decision of the High Court to the Court of Appeal.
The Court of Appeal overturned the High Court decision. This Court held that VAT is applicable to commercial property sales, as the exemption under the VAT Act applies solely to land and residential premises
The Court of Appeal established the main issues in the appeal as follows:
- Interpretation of Paragraph 8 of Part II of the First Schedule to the Act,
- Whether Paragraph 8 of Part II of the First Schedule to the Act is ambiguous as regards the meaning of “land”, “residential premises” and “commercial premises”
- Whether the refund claimed by Mr. Ndegwa was payable
According Paragraph 8 of Part II of the First Schedule to the VAT Act the following are exempted from payment of VAT:
“Supply by way of sale, renting, leasing, hiring, letting of land or residential premises;
“Residential premises” means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation; and the answers to the following questions.”
Interpretation of Paragraph 8 of Part II of the First Schedule to the Act,
The Court of Appeal disagreed with the High Court’s interpretation of land on matters VAT. The Court of Appeal clarified that the definition of land in Article 260 of the Constitution of Kenya,2010 applies if, and only if, the context permits. If the context does not permit, that definition will not apply. What that means is that the Constitution permits a definition of land that is different from that given in Article 260 of the Constitution of Kenya,2010, depending on the context. For example, In the Mining Act, land is understood to exclude the subsoil if it has minerals. One cannot validly contend that the Mining Act is ambiguous because its appreciation of land is different from that of the Constitution. In the same vein, there is absolutely nothing unusual for the VAT Act to define land so as to exclude premises erected thereon, notwithstanding the definition of land in the Constitution, which defines land to include the airspace above.
Whether Paragraph 8 of Part II of the First Schedule to the Act is ambiguous as regards the meaning of “land”, “residential premises” and “commercial premises”
The Court of Appeal held that VAT Act is an exemption statute, meaning that what is not exempted by the Act from levy of VAT is vatable. The palpable exclusion in Paragraph 8 of Part II of the First Schedule to the Act of supply of the class of premises known as “residential” from levy of VAT, without any mention of supply of the class of premises known as “commercial”, must mean that unlike residential premises, supply of commercial premises is not exempt from levy of VAT.
Whether the refund claimed by Mr. Ndegwa was payable
The Court having determined that sale of commercial buildings is not except from VAT payment, it held that KRA lawfully applied VAT on sale of commercial property.
In the upshot, the Court of Appeal overturned the High Court’s decision, reinforcing that sale of commercial properties attract VAT.
Implication for Stakeholders in Property Development
- The sale of commercial properties will now attract VAT at the rate of 16%. Purchasers and sellers must now factor VAT into the pricing and financial structuring of commercial property transactions.
- There will be increase in transaction costs. Buyers of commercial properties will now have to pay an additional 16% VAT on their purchases.
- Compliance Obligations: Sellers are required to account for and remit VAT accurately to avoid penalties and interest from KRA. Proper documentation and tax compliance are critical.
