Case study: Kenya Revenue Authority vs David Mwangi Ndegwa (CIVIL APPEAL NO. 65 OF 2019)
In this case, the Respondent bought land at Ksh 70,000,050. Subsequently, the Appellant (KRA) demanded Ksh 11,200,080, which was VAT charged at a 16% rate of tax.
Although the Respondent paid the amount as demanded, it filed a suit in the High Court challenging the levying of VAT on the sale of land and argued that the sale of land, whether with residential or commercial property, was exempt from VAT.
The High Court found that the sale of land was exempt from VAT under paragraph 8 of Part II of the First Schedule to the VAT Act. Accordingly, it ordered a refund of the VAT paid by the Appellant to the Respondent.
Dissatisfied with the High Court judgment, KRA filed the instant appeal to the Court of Appeal with its core argument being that the judge had erred in law by finding the sale of land with or without any structures on it was exempted from VAT.
The Appellant argued that paragraph 8 was categorical in specifying what transaction relating to land is exempted from VAT.
The Court of Appeal held in its judgment that the supply of commercial property is not exempt from VAT, and the exemption under paragraph 8 only applies to residential premises.
What is an exempt supply under the VAT regime?
Under the VAT regime, an exempted supply is a supply that is not subject to tax. These supplies, which include goods services, are specified in the first schedule of the First Schedule of the Value Added Tax Act.
What is the difference between zero-rated supplies and exempt supplies?
Zero-rated supplies are supplies of taxable supplies that are subject to VAT at a 0% rate of tax. On the other hand, the supply of VAT-exempted goods is not subject to VAT.
Hence, a taxpayer making taxable zero-rated taxable supply can claim input tax paid on the raw materials used in manufacturing the goods, while a taxpayer making an exempted supply cannot claim input tax paid on the raw materials.
What is the rate of tax in VAT?
In the VAT regime, the rate of tax is 0% in the case of zero-rated supplies or 16% of the taxable value of the taxable supply.
What is the VAT position as it pertains to land transactions?
Paragraph 8 of Part II of the First Schedule to the VAT Act stipulates that supplies by way of sale, renting, leasing, hiring, letting of land or residential premises are exempted from VAT.
However, this does not apply where the hiring, leasing, letting or renting is with respect to car park services or conference or exhibition purposes, except where the exhibition and conferences are provided for educational institutions as part of learning.
