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Corporate

VAT Act hits sale of business premises hard

Part of the newly constructed Lenana Place in Nairobi. The new levy on commercial property coincides with City Hall’s plan to raise land rates from 17 per cent to 34 per cent. SALATON NJAU
Part of the newly constructed Lenana Place in Nairobi. The new levy on commercial property coincides with City Hall’s plan to raise land rates from 17 per cent to 34 per cent. SALATON NJAU 

Buyers of commercial property will have to dig deeper into their pockets following the operationalisation of a law introducing tax on sale of business premises. The new cost is expected to be passed on to consumers.

The VAT Act 2013, which became effective on Monday of last week, introduces a 16 per cent tax charge on sale of all commercial properties such as office buildings, industrial premises, retail outlets, hotels and exhibition space.

Buyers of holiday homes, conference facilities and apartments used for business purposes will also pay more after the properties were included in the consumption tax bracket. Further, sale of land to be used for commercial purposes will also be subject to VAT.

The levy on commercial property coincides with City Hall’s plan to increase land rates to 34 per cent, double the current rate of 17 per cent.

“This makes it more costly for businesses to acquire commercial property hence increasing their overheads,” said Mr Samuel Mwaura, the tax director at Grant Thornton Kenya.

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“If investors spend more on acquiring property they are likely to pass on the higher set up costs to consumers to maintain their margins.”

Effective Monday last week, all transactions involving sale of commercial properties are liable to a 16 per cent charge, significantly raising Nairobi’s property prices which have been going up.

For example, a 3,000 square-feet office in Westlands district which previously cost Sh48 million will now go for Sh55.6 million inclusive of VAT.

“It will have a negative value and affect the volume of commercial property transactions,” said Ben Woodhams, managing director at Knight Frank Kenya.

Mr Woodhams said that the tax measure would deter companies from buying commercial properties and instead rent premises.

Treasury secretary Henry Rotich has said the government plans to raise Sh10 billion annually from the tax measures spelt out under the new VAT law.

Property owners are already paying income tax from rental earnings, charged at the rate of 30 per cent. Kenya Revenue Authority (KRA) has also been charging VAT on rental and leasing fees for commercial properties since 2008.

However, dealings in residential property will not be subject to tax, sparing homebuyers the pain of paying more to buy a home.

The VAT Act defines residential property as “land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation.” 

The pain of the levy on commercial property will be borne by consumers who are already saddled with VAT on essential goods such as cooking gas, electricity, exercise and text books and mobile phones.

This will be made worse when Nairobi County government rolls out new service charges on land rates and retail shops.

In Kenya, land rates are charged based on the market value of a similar undeveloped size technically referred to as Unimproved Site Value (USV). Retail outlets have not been spared the increase in charges and must pay almost double in licensing fees to operate in the capital.

Supermarkets with more than 100 employees and shop floors of more than 5,001 square metres have been hit hardest by the operating licence fee increment. They must now pay Sh100,000 up from Sh60,000 to remain in business.

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