Introduction

Taxes are the lifeblood of any government, but for many taxpayers, they are also a source of endless disputes. In Kenya, the courts have recently weighed in on key tax controversies, providing much-needed clarity on how certain transactions should be taxed. From the sale of commercial buildings to repossessed vehicles and interchange fees, these rulings reaffirm the Kenya Revenue Authority’s (KRA) mandate in tax assessment. More than just legal victories for KRA, these decisions set critical precedents that businesses and individuals must now navigate to stay compliant.

1. Value Added Tax (VAT) on Sale of Commercial Buildings

The Court of Appeal in the matter of Kenya Revenue Authority vs David Mwangi Ndegwa (2019) eKLR turned around the High Court’s decision that had declared VAT was not payable on the sale of buildings whether residential or commercial. The main issue for determination in this matter was the interpretation of the services exempt from payment of VAT which provides one of the services exempt to be the supply by way of sale, renting, leasing, hiring, letting of land or residential premises. The High Court had previously applied the definition of land to include the surface of the earth and subsurface rock, hence finding that the sale of commercial premises was exempt from payment of VAT as the commercial property was on the surface of the earth.

The Court of Appeal found that the High Court had erred in its interpretation and that the definition of land would vary based on the context. In particular, as the Act had only specified supply of residential premises was exempt from payment of VAT, this meant that the supply of commercial buildings was not exempt from payment of VAT. The court therefore declared that KRA had lawfully levied VAT on the transaction.

2. VAT on Sale of Repossessed Motor Vehicles

KRA conducted an audit on KCB Bank for the period 2018 to 2022, resulting in a tax assessment of Kshs. 1.19 Billion. The bank objected to the assessment, leading to a revised tax demand of Kshs. 1.22 Billion. KCB Bank therefore filed an appeal to the Tax Appeal Tribunal in the matter of KCB Bank Kenya Limited v Commissioner Legal Services & Board Coordination (Tax Appeal E023 of 2024). KCB Bank argued that regarding the sale of repossessed vehicles, which were auctioned following loan defaults, was exempt from VAT as

www.thelawfirm.co.ke © Kiruti & Co. Page No.2 the sale was intrinsically linked to the provision of credit, a financial service that is VAT-exempt under the VAT Act. KRA, on the other hand, maintained that the sale of repossessed assets is a separate taxable supply since KCB was engaged in a commercial transaction involving the transfer of ownership of goods.

The Tax Tribunal ruled in favor of KRA, holding that the VAT Act does not provide for an exemption on sales by auction. The Tribunal noted that since KCB Bank was listed as a co-owner of the vehicles, the sale was a taxable transaction subject to VAT at the standard rate.

3. Withholding Tax (WHT) on Card Business Interchange Fees

Another significant contention was whether interchange fees paid by KCB Bank to local banks for processing card transactions constituted management or professional fees, making them subject to Withholding tax. KCB argued that these fees were automated transaction costs and not professional services requiring human intervention.

However, the Tribunal relied on the precedent set in Commissioner of Domestic Taxes v Barclays Bank of Kenya Ltd [2009] eKLR, which classified such interchange fees as professional services subject to WHT. The Tribunal ruled that KRA was justified in assessing WHT on interchange fees for the period 2019 to 2021, amounting to Kshs. 369 million.

Conclusion

By reaffirming KRA’s tax assessment authority, the rulings provide valuable guidance on how different transactions should be treated under tax law. As tax regulations continue to evolve, proactive compliance remains the best approach to avoiding disputes and ensuring smooth financial operations.