VAT EXEMPTION NOT APPLICABLE ON COMMERCIAL LAND & BUILDINGS PURCHASES: KEY COURT RULING EXPLAINED

VAT Exemption Not Applicable on Commercial Land & Buildings Purchases: Key Court Ruling Explained

March 27, 2025

By Maina Susan – Tax & Finance Writer

Key Takeaways

Commercial Land and Buildings sale or purchase transactions are VAT – Taxable.
Only residential premises are explicitly exempt from VAT under the VAT Act.
Legal definitions matter: The distinction between “land” and “buildings” affects tax liability.
Strict interpretation of tax laws prevents subjective exemptions.
Businesses must factor in VAT when engaging in commercial land and buildings transactions to avoid unexpected tax liabilities.

Introduction

Value Added Tax (VAT) is applicable on the sale or purchase of “Commercial Land and Buildings”.

This legal position was reinforced by a ruling from the Court of Appeal in the case of Kenya Revenue Authority (KRA) V.S David Mwangi Ndegwa.

This article examines:

The background of this case
The arguments presented by both parties
The rulings issued by the High Court and the Court of Appeal
Implications of this verdict for future transactions.

The discussion is divided into two sections:

The High Court’s Verdict
The Court of Appeal’s Ruling

1. Case Background

Parties Involved
- Kenya Revenue Authority (KRA): Appellant
- David Mwangi Ndegwa : Respondent
- Court: Court of Appeal & The High Court of Kenya
- Date of Ruling: 21st March 2025
- The High Court of Kenya
- The Court of Appeal

Transaction Details:
- On 11th December 2013, David Mwangi Ndegwa purchased a piece of land from Standard Chartered Bank Kenya Limited.
- The land also had a commercial building erected on it.
- The purchase price was Ksh 70,000,050.
- KRA later demanded 16% VAT on the transaction, totaling Ksh 11,200,080.

Legal Challenge:
- The respondent (David Mwangi Ndegwa) filed a suit against KRA on 30th October 2015, arguing that the purchase transaction was exempt from VAT under Paragraph 8 of Part II of the First Schedule of the VAT Act.
- He sought a declaration that no VAT was payable on the purchase of the commercial land and building, a full refund of the amount paid, and reimbursement of legal costs.

2. Section 1: High Court Verdict

On 11th January 2016, KRA filed its defense, asserting that VAT was indeed payable under the VAT Act.

The High Court, presided over by Justice Kasango J, ruled as follows:

The Commercial land and Building Transaction was exempt from VAT under Paragraph 8 of Part II of the First Schedule of the VAT Act.
Article 260 of the Constitution defines land as including “what is on the surface, above the surface, and beneath the surface.”
Since the purchase involved land and a structure erected on it, the judge ruled that it was exempt from VAT.
The judge also cited ambiguity in Paragraph 8, arguing that it does not explicitly differentiate between commercial and residential premises.
KRA’s claim for VAT was dismissed, and the court ordered a refund of Ksh 11,200,080 to the respondent.
Both parties were directed to bear their own legal costs

3. Section 2: Court of Appeal Ruling

KRA, dissatisfied with the High Court ruling, appealed the decision on the following grounds:

Did the definition of “land” under Article 260 of the Constitution include building?
Was Paragraph 8 of Part II of the First Schedule ambiguous regarding VAT on commercial Land and buildings?
Was the respondent entitled to a VAT refund?

The Court of Appeal ruled as follows:

1. The High Court’s interpretation was erroneous.

The court clarified that under the Land Act 2012, the definitions of “land” and “building” are distinct:

Land: “Includes what is on the surface of the earth and the airspace above it.”
Building: “Any structure or erection, whether permanent or temporary, movable or immovable.”

2. Strict interpretation of tax statutes is necessary. Courts cannot create tax exemptions beyond what is legislated.

3. No law provides a tax waiver for Commercial land and buildings. Article 210 of the Constitution states that only an Act of Parliament can impose, waive, or vary tax obligations.

4. Paragraph 8 of Part II of the First Schedule fo the VAT Act explicitly exempts only residential premises from VAT.

It states at follows:

- “Supply by way of sale, renting, leasing, hiring, or letting of land or residential premises is VAT-exempt.”
- “Residential premises” means land or a building occupied or capable of being occupied as a residence but does not include hotel or holiday accommodation.”
- “Commercial Land and Buildings” are not mentioned, meaning they are VAT-taxable.”

5. No ambiguity exists in the VAT Act regarding tax on commercial Land and buildings.

6. The respondent was not entitled to a VAT refund, as the VAT was lawfully levied.

The Court of Appeal overturned the High Court ruling and declared that:

VAT was correctly charged on the transaction of the commercial land and buildings.
No tax refund was due to the respondent.
KRA was entitled to recover legal costs from the respondent.

Conclusion

In conclusion, the Court of Appeal’s ruling clarifies the VAT applicability on commercial land and building transactions, affirming that VAT is not exempt on such purchases.

This decision sets a clear precedent, ensuring that businesses factor in VAT in future commercial property deals.

If you need expert guidance on VAT and tax compliance,Quartet offers tailored solutions to help your business stay aligned with the latest tax regulations.

Disclaimer:

This article does not constitute tax advice. Consult a qualified tax professional for specific tax guidance.

Sources

Kenya Revenue Authority v Ndegwa (Civil Appeal 65 of 2019) [2025] KECA 510 (KLR) (21 March 2025) (Judgment) – Kenya Law

https://new.kenyalaw.org/akn/ke/act/2012/6/eng@2022-12-31

https://www.kenyalaw.org/kl/fileadmin/pdfdownloads/

Acts/ValueAddedTaxActCap476.pdf