The Kenya Revenue Authority (KRA) is facing millions of shillings in refund claims after the High Court declared that it had illegally charged value added tax (VAT) on the sale of a commercial building.
Justice Mary Kasango ruled that VAT is not payable on transactions of land whether or not the buildings thereon are residential or commercial, a big blow to the taxman who has been riding on the charge as it races to meet revenue targets.
Justice Kasango made the decision in a suit David Ndegwa had filed against KRA for charging VAT on a property he bought in Kiambu in 2013. Mr Ndegwa had argued that there is no law allowing KRA to charge VAT on the sale or purchase of land regardless of the kind of property that is on it.
KRA immediately filed an appeal against the decision that was rendered last Thursday.
“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 buildings thereon are residential or commercial buildings,” the judge ruled, unleashing a big blow to the taxman, who collected Sh52.8 billion local VAT in the three months between July to September.
KRA was further directed to refund Mr Ndegwa the Sh11.2 million he had paid as VAT, plus accruing interest from the date of judgment until paid in full.
KRA argues in its appeal that the judge disregarded its submission as to whether the VAT is chargeable on Mr Ndegwa’s transaction therefore arriving at an erroneous decision.
The taxman is seeking annulment of Justice Kasango’s judgment and the orders of November 29, 2018 and its substitution with a judgment dismissing the respondent’s suit.
At the centre of the dispute is a transaction dated December 11, 2013 in which Mr Ndegwa purchased from Standard chartered Bank a piece of land with a building on it and was charged Sh11.2 million VAT at the rate of 16 percent of the purchase price.
Mr Ndegwa moved to court arguing that no VAT is chargeable on the property under the provisions of Section 8 of Part II of VAT Act 2013.
The section provides that ‘the supply of the following services shall be exempt from VAT: supply by way of sales, renting, leasing, hiring, letting of land or residential premises.”
He argued that the law could not exempt purchase of the land from the tax and leave the property standing on the said land because even commercial premises stand on land. KRA opposed the argument, noting that VAT exemption is in respect of sale of land and residential premises, and that the sale, renting, leasing, hiring or letting of commercial buildings is a taxable supply that is subject to VAT at the rate of 16 percent.
Null and void
Mr Ndegwa argued that KRA’s admission that land is exempt makes any attempt to create a legal distinction between land and commercial premises null and void.
Justice Kasango agreed with the submission, noting that the Constitution defines land as comprising the airspace above the surface. She said that since the land is exempted it follows that whatever is above and below the surface is also exempted.
KRA further argued that the tax was paid through Standard Chartered therefore, Mr Ndegwa cannot claim for refund.
It further argued that the claim for refund is time barred since Section 30 of the VAT Act 2013 states that claim for refund should be lodged within six months from the date the tax became due.
On this, the judge observed that since Mr Ndegwa had registered his opposition to the VAT, he cannot be said to have paid the tax willingly.