Kenya:Temporary relief for the Taxman

TAX abstract

In our legal alert dated 14th December 2018, we highlighted a decision by the Hon. Justice Mary Kasango delivered at the High Court of Kenya on the 29th November 2018, regarding Civil Suit No. 541 of 2015 (the Judgment) which sought to clarify the interpretation of paragraph 8 of Part II of the First Schedule to the Value Added Tax Act of Kenya, No. 35 of 2013 (the VAT Act). The suit had been filed by David Mwangi Ndegwa (the plaintiff) against the Kenya Revenue Authority (KRA) alleging that the KRA had collected VAT in contravention of the VAT Act.

The essence of the suit was that paragraph 8 of Part II of the First Schedule to the VAT Act exempts the supply by way of sale, renting, leasing, hiring, letting of land or residential premises from VAT and that the exemption ought to apply to commercial premises as well. However, the renting and leasing of commercial premises has, since 1 January 2008, been chargeable to VAT at the rate of sixteen percent (16%) whilst the sale of commercial premises has been chargeable at the same rate since the enactment of the VAT Act. The High Court, while recognizing the ambiguity of paragraph 8 of Part II of the First Schedule of the VAT Act and the lack of a definition of “land” under the VAT Act, agreed with the Plaintiff’s arguments that the constitutional definition of “land” included all land both with commercial and residential premises. Essentially, the High Court made a ruling that the sale, renting, leasing and letting of commercial premises was exempt from VAT.

The KRA, vide a notice of motion dated 16 January 2019, applied to the High Court for a stay of execution of the above decision of Hon. Kasango pending the hearing and determination of its appeal in the Court of Appeal. The Court issued the stay orders in respect of the decision on 17th January 2019, pending the hearing and determination of the appeal.

Putting it into Perspective

The stay orders offer the Taxman a temporary relief and an opportunity to keep collecting VAT on the sale, renting, leasing and letting of commercial premises in the interim pending the determination of the appeal.  Until such time that the appeal is heard and determined, transactions in commercial property continue to be subject to VAT.  This will certainly be welcome to KRA who has been grappling with dwindling revenues in the last few months. In the meantime, we await the determination of the appeal in the Court of Appeal.