Musalia Mudavadi said charging VAT has led to high house rent. Not true

Blue Bells Gardens Apartments in in Mlolongo, Machakos County in a Picture taken on February 20,2017. PHOTO | EVANS HABIL | NATION MEDIA GROUP

Has VAT led to high house rents?

“…I’m speaking like a minister of finance. When you are borrowing the way they are borrowing, now you find that we have VAT on rent. We didn’t have VAT on rent. Now when you rent a house, the landlord must pay VAT, which he never used to pay. The landlord then pushes the VAT to the tenant. That is why rent is going up, because the Jubilee government has introduced VAT on rent…”

-         Nasa’s Musalia Mudavadi in Kiambu on July 4

Nasa Co-principal Musalia Mudavadi was speaking in Swahili as the opposition coalition stopped in Limuru during its pitch through Kiambu County. 

He claimed that due to the increasing debt that the Jubilee government has taken on, they have added Value Added Tax (VAT) to house rent.

The Income Tax Act of 1974 had stated that tax was payable on gains of profits from "a right granted to another person for use or occupation of property". But the government began to collect income taxes from rent in 2012 more aggressively, following the Budget Speech by then Finance Minister Njeru Githae.

“The Kenya Revenue Authority will shortly implement a comprehensive strategy to ensure that all landlords are effectively brought into the tax net and all rental income taxes are paid,” Mr Githae said

COMMERCIAL REAL ESTATE

Prior to 2012, many landlords did not pay taxes, and part of the reason was that government was unable to track down all the landlords who were eligible to pay tax. But KRA Commissioner General John Njiraini reported that KRA had collected Sh1 billion in rental income tax in the 2012/2013 year.

The Finance Act 2015 required that irrespective of other acts, income tax on rental income would be charged from January 2016. In May 2017 KRA said it had collected Sh10 billion since January 2016, and collects about Sh4.8 billion every year. 

Value Added Tax is charged at the rate of 16 per cent. However, the taxman only levies it on commercial real estate, not residential real estate, which is exempted by the VAT Amendment Act 2016.

It is not unreasonable to conclude that Mr Mudavadi meant residential rent when he mentioned house rent in Limuru. Furthermore, he does not specify that it is commercial rent and not residential.

Given that VAT is not charged for residential rent, it cannot have contributed to the high rents he decried in Limuru.