VAT EXEMPTION ON COMMERCIAL PROPERTIES VIS A VIS RESIDENTIAL PREMISES

VAT is a type of tax that is imposed on the supply of goods and services, with the eventual consumer bearing the Tax burden.

In a recent decision, under the case of Kenya Revenue Authority v Ndegwa (Civil Appeal 65 of 2019) [2025] KECA 510 (KLR), the Court of Appeal, made a significant clarification on the Applicability of VAT in the sale of Commercial Properties vis a vis Residential Properties.

The case was an Appeal emanating from the High Court, and sought an interpretation on principally whether: VAT is payable on Land transactions, irrespective of whether the buildings on it are residential or commercial properties.

Mr ndegwa (“the Appellant”), had purchased land (which is exempt from VAT) but with commercial properties on it. The Kenya Revenue Authority pursued Mr Ndegwa who paid Kshs 11,200,000/ as VAT. Subsequently, Mr Ndegwa approached the High Court, seeking a refund of the monies. He argued at the High Court that VAT was not payable in the circumstances. The High Court agreed with him, and stated that the definition of Land includes the structures on it and as such, the purchase was exempted from VAT.

The Court of Appeal, in overturning the High Court’s decision, stated that a different approach has to be taken in defining land, in the context of Tax. The Court held that VAT is Applicable in purchase or leasing of commercial properties; that if a person purchases land which is exempt from VAT, but contains commercial buildings, they would be require to pay VAT on the buildings.

Take Away:

• The decision clarifies that VAT exemption, can only be accorded to properties that are solely residential in nature.
• If one buys Land with commercial buildings, they would be required to pay VAT on the buildings.
• This would translate to higher costs for buyers who purchase or lease commercial properties.

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