The Sale of Commercial Property is Vatable, The Court of Appeal Rules.

The High Court, on 29/11/2018 held that the latter provision was ambiguous; construed it strictly in favor of DMN; and concluded that no value added tax (VAT) was chargeable on the sale of land, whether the premises thereon were residential or commercial. Accordingly, the court ordered the Kenya Revenue Authority, to refund the VAT that DMN had paid upon purchase of a commercial premises.

The central question in this appeal is the correct interpretation of section 5 of the 2013 VAT Act as read with paragraph 8, Part II of the First Schedule of the same Act.

KRA appealed to the Court of Appeal

KRA argued that:

• The High Court erred in holding that the definition of land in the Constitution includes buildings. Counsel cited the Land Act, 2012, and submitted that “land” and “buildings” have separate and distinct meanings, so that “land” is as defined in section 260 of the Constitution while “buildings” are defined to mean any structure or erection of any kind whatsoever, whether permanent or temporary, moveable or immoveable and complete or incomplete.
• The court must interpret a statute according to the intention of the legislature and that the words used in a statute are the best indicators of the intention of the legislature, so that if the words are precise and unambiguous, no more expounding is necessary.  The ordinary meaning of land and buildings as used in the legislation and the Cambridge Dictionary did not mean one and the same thing as held by the High Court
• By dint of Article 210 of the Constitution, imposition, waiver or variation of tax can only be provided by legislation and that in this case, no legislation has waved VAT on commercial buildings, meaning that it is payable.
• There was no ambiguity because the VAT Act, as an exemption statute, has not exempted commercial buildings from VAT.
• The legislative history  as regards payment of VAT on commercial buildings, starting with the year 2006  demonstrate that under the VAT Act 2013, commercial buildings were not exempt from VAT. The legislative history demonstrated that the legislature has always distinguished between land and buildings and also between residential and commercial buildings.

DMN argued that:

• After including “sale of land” among the VAT exempted supplies, Parliament did not see the need to specifically include “sale of buildings” in the list because the definition of “land” in the Constitution includes buildings thereon.
• Regarding the specific reference to “residential premises” in paragraph 8,  the words “land or residential premises” must be read together to mean the supply of land or residential premises are exempt from VAT
• Land is defined to include the surface of the earth, the subsurface rock, and the airspace above the surface which means that buildings on the surface of the earth are part of the land. Therefore, land cannot be sold independent of the buildings standing thereon, and that it would result in confusion and chaos if the position urged by KRA were applied to sale of mixed-use property.

In its judgement on 21/03/2025, the Court of Appeal observed that:

• There is no ambiguity in paragraph 8 of Part II of the First Schedule to the Act and that the High Court erred in finding and holding otherwise
• KRA lawfully levied VAT on DMN’s transaction involving the sale of commercial premises and therefore, the High Court erred by directing KRA to refund to DMN the sums it had levied as VAT.

As such KRA Won!