On 29 November 2018, High Court Judge Lady Justice Mary Kasango delivered a judgment in the case of David Mwangi Ndegwa (Mr. Ndegwa) v. the Kenya Revenue Authority (Civil Suit No. 541 of 2015) (the KRA). In brief, Mr. Ndegwa had brought an action against the KRA seeking a declaration that Value Added Tax (VAT) is not payable on a transaction for the sale or purchase of land, regardless of whether or not the buildings standing on it are residential or commercial. Mr. Ndegwa had also sought a VAT refund of KES 11,200,000 that he had paid for the purchase of a commercial property. The key question for determination was whether a transfer of commercial premises is a taxable or exempt supply under the provisions of Part II, paragraph 8 of the First Schedule to the VAT Act. Click here to read our legal alert for a detailed analysis of the case.
By way of update, High Court Judge Lady Justice M. Odero issued an order on 17 January 2019 allowing for a stay of execution of the 29 November 2018 judgment, pending hearing and determination of the case in the Court of Appeal. While it is debatable whether the stay of execution as drafted would apply to a declaration by the High Court that VAT on purchase of commercial land is not payable, it is our understanding that the KRA believes it would be.
Legal Implications and Next Steps
What this means is that VAT, at a rate of 16 percent, on the sale of commercial buildings will apply until the Court of Appeal entertains and determines the appeal. With the Budget Cycle Policy Statement released on 10 January 2019, it may be an opportunity for the KRA and the National Treasury to clarify the law relating to the disposition of residential and commercial property for VAT purposes ahead of the 2019/2020 Budget cycle.
While the Court of Appeal considers the matter, sellers of commercial property should take prudent approach and charge VAT on such sales as the Court of Appeal considers the appeal.
We will continue to keep you appraised on the progress of this case.