Is VAT chargeable on the Sale of Land?

Case Study: Sayani Investments Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E448 of 2023) [2024] KETAT 1058 (KLR) (19 July 2024) (Judgment)

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On 6 April 2023, KRA carried out a compliance check and raised corporation tax, VAT and capital gains tax additional assessments. SIL lodged a late manual objection on 4th May 2023.

SIL filed its valid objection on 16th May, 2023.

KRA confirmed the assessments through an objection decision dated 27th June 2023.

The Appealed to the TAT on 25th July 2023.

Among the grounds of appeal were:

• That KRA erred in fact and in law in determining that Value Added Tax (VAT) was payable on the transfer of vacant land, contrary to the provisions of paragraph 8- Part Il of the first schedule to the Value Added Tax Act.
• That KRA erred in fact and in law in determining that the time of supply of the subject property for VAT purposes was the point at which SIL entered into the Agreement for Sale with the buyer of the Land.

SIL argued that:

• On 2nd March 2020, a truck hit one of the pillars supporting the Building, substantially damaging it. On 3rd March 2020, SIL notified the NCC of the dire state of the building and requested them to survey the damage and issue approval for closure of the premises, demolition and total reconstruction of the entire canopy and the holding pillars, which were beyond repair.
• Before SIL could re-develop the Land, it received an unsolicited expression of interest from a potential purchaser and after due consideration, it decided to sell it to ATCL. SIL and Purchaser executed an Agreement for Sale dated 9th July 2020 .
• Pursuant to the application by SIL, the NCC inspected the Building and granted SIL the demolition hoarding permit dated 28th September 2020 allowing SIL to demolish the Building.
• having demolished the Building, one of the conditions for the sale of the Land, under the agreement had been met and SIL's Advocate proceeded to remit the deposit of Kenya Shillings Thirty Million to SIL. The deposit was paid in two (2) tranches of Kshs. 7,000,000.00 on 26th November 2020 and Kshs. 23,000,000.00 on 3rd December 2020.

KRA argued that:

• it requested SIL to avail supporting records to support the grounds of objection but SIL allegedly failed to avail any records to support the objection as required under Section 51(7) of the TPA and their grounds of objection under Section 51(3) of the TPA. Consequently, KRA confirmed the assessments on 27th June 2023.
• On VAT- Commercial building at the time of supply; KRA stated that at the point of sale of the land as depicted in the agreement for sale , there was a building on the land which was to be demolished as a precondition to the sale. Deposits were placed with SIL’s advocates who would then transfer to SIL upon notifying the buyer on the execution of the demolition.
• in line with Section 12 of the VAT Act, KRA considered that the time of supply is the point that SIL entered in the agreement for sale with the buyer as satisfactory evidence had not been provided to support the execution and authenticity of the agreement.

In its ruling on 19/07/2024, TAT observed that:

• the Building had been demolished in order for SIL to meet the conditions of the Agreement for Sale. SIL adduced the Agreement for Sale dated 9th July, 2020 to buttress its position.
• the High Court in David Mwangi Ndegwa vs. KRA Civil Suit No. 541 of 2015 held that “Value Added Tax is not payable on a transaction for the purchase or sale of land whether or not the buildings thereon are residential or commercial buildings”. This declaratory order still stands.

As such KRA Lost

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