VAT Not Chargeable on Non-Revenue Deposits and Residential Rent Income

Case Study: Wamunyinyi v Commissioner of Intelligence, Strategic Operations, Investigations and Enforcement (Tribunal Appeal E906 of 2023) [2025] KETAT 50 (KLR) (17 January 2025) (Judgment)

Wamunyinyi is an individual registered taxpayer engaged in the business of farming and offering both residential and commercial rental spaces. KRA conducted investigations on Wamunyinyi’s transactions for the years 2016 to 2020 and raised additional Income tax and Value Added Tax (VAT) assessments in a letter of findings dated 21st April 2022.

KRA issued assessment orders on 22nd December 2022 to which Wamunyinyi objected in a letter dated 28th August 2023. KRA subsequently issued its Objection decision on 24th October 2023, partially allowing Wamunyinyi’s Objection and confirming the VAT assessments.

Wamunyinyi appealed to the TAT on the following grounds:

• That KRA erred in law and fact by raising additional assessments for VAT on residential rental income contrary to the provisions of the First Schedule to the VAT Act, 2013.
• That KRA erred in law and fact by raising additional assessments for VAT on non-revenue items such as deposits received from tenants for both the commercial and residential rental income, contrary to the provisions of Section 5 of the VAT Act, 2013.

Wamunyinyi argued that:

• KRA erroneously treated the tenant’s deposits as part of Wamunyinyi’s taxable income yet the said amounts were either refunded or remain refundable to the tenants upon lapse of the tenancy period. That as such, no income was generated by Wamunyinyi as the tenant deposit was refundable.
• Paragraph 8 of Part II of the First Schedule to the VAT Act provides that residential rental income is an exempt supply and it is therefore erroneous for KRA to raise additional VAT on the same.

KRA responded that:

• Wamunyinyi failed to tender credible and cogent evidence demonstrating that part of the underdeclared income constituted funds received as part of rental agreements and that said amounts comprised deposits under aforementioned tenancy agreements.

In its judgment on 17/01/2025, the TAT observed that:

• Wamunyinyi presented to the Tribunal a schedule showing the amounts of residential rental income for the years 2016, 2017, 2018, 2019 and 2020, and copies of tenancy agreements for his commercial and residential properties. These tenancy agreements enumerated the following information:

a. Amounts referred to as rent.

b. Amounts referred to as refundable deposit.

c. Biennial 10% increase in rent.

• KRA did not consider the tenancy agreements presented by Wamunyinyi in arriving at its Objection decision, thus contravened Section 51(8) of the Tax Procedures Act and in the course of that contravention prejudiced Wamunyinyi
• Wamunyinyi discharged his burden of proof, as required under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, by presenting tenancy agreements, thus, establishing that part of the bank deposits in the periods of 2017, 2018, 2019 and 2020 related to rents for residential premises that are exempt from VAT pursuant to Paragraph 8 of Part II of the First Schedule to the VAT Act.
• KRA erred in treating residential rental income as taxable and assessing VAT on the residential rental income for the periods of 2017, 2018, 2019 and 2020.
• Refundable tenant deposits, unless applied to meet commercial rent, are not taxable under the VAT Act as they a not consideration for a taxable supply which is defined under Section 2 of the VAT Act as follows: –

“”taxable supply” means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person…”

As Such Wamunyinyi won

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