The tax tribunal has curtailed the Kenya Revenue Authority (KRA) from levying value-added tax on county revenues, ruling that fees and charges collected by local governments in the course of delivering public services do not amount to commercial activity.
- •In a decision in a case between the County Government of Kiambu and the tax authority, the Tribunal set aside most of a disputed tax bill that had originally reached about Ksh 559.9 million before being revised to Ksh 194.6 million after internal review.
- •The ruling removes VAT, withholding taxes, and several categories of employee-related taxes from the assessment, leaving only limited items intact where the county failed to provide adequate documentation.
- •At the center of the dispute was whether revenue raised by Kiambu County from permits, licenses, fees and other charges (also known as own-source revenue) could be treated as taxable supplies under VAT law.
The KRA argued that the county had generated income streams that were not declared for VAT and that some of those streams, including rent from facilities and certain service charges, fell within the scope of taxable activity.
The authority also maintained that the county had also failed to properly account for payroll taxes, withholding obligations, and employee benefits, pointing to gaps in records and inconsistencies in filings.
Kiambu County took the opposite view, arguing that it is not a commercial entity but a constitutional body mandated to deliver public services. The county said its revenue streams arise from statutory powers to impose charges and fees, not from engaging in business.
The county government noted that treating those charges as taxable supplies would effectively convert public service delivery into a commercial enterprise and expose citizens to double taxation; first through county levies and again through VAT on the same payments.
The county also challenged the structure of the assessments, saying the tax authority failed to clearly explain how it arrived at several figures, particularly for withholding taxes.
The tribunal sided with the county on the core question of VAT on its revenues. It found that county governments operate within a constitutional framework designed to provide social and welfare services rather than to generate profit, and that their functions do not meet the legal threshold of “business activity” required for VAT to apply.
“The provisions of the law show that counties are not entities formed to raise or collect money for the furtherance of business. Accordingly, their services fall outside the definition of taxable services to which VAT applies,” the tribunal ruled.
That reasoning was reinforced by the VAT law’s explicit exemption for public, social and welfare services provided by government entities. The tribunal determined that Kiambu’s revenue streams fell within this category and that the tax authority had not demonstrated that the county had stepped outside its constitutional mandate into commercial activity.
The decision also dismantled large portions of the withholding tax claims. While the tax authority acknowledged during the dispute that some payments did not attract withholding tax and that certain electronic payments had not been factored into its initial calculations, it nonetheless upheld much of the assessment without providing a detailed breakdown.
The tribunal found that approach deficient and noted that a taxpayer cannot be expected to meet an unspecified liability. Without clear identification of which transactions were taxable and why, the withholding tax assessments could not stand and were annulled.
On payroll taxes, the outcome was mixed. The tribunal rejected attempts to tax certain employee-related items including airtime and internet bundles provided for official use, as well as petty cash and facilitative allowances. It held that such payments do not constitute personal income or gains to employees when they are strictly tied to official duties and fall outside the scope of employment taxation.
However, the tribunal upheld taxes on motor vehicle benefits after finding that the county did not provide logs or records to show that vehicles assigned to senior officials were used strictly for official purposes. It also sustained some PAYE-related adjustments tied to discrepancies in filings and pension contributions, citing the county’s failure to produce documentation to substantiate its explanations.
By drawing a firm line between public service delivery and commercial activity, the tribunal has effectively shielded a significant portion of county revenue from VAT exposure.
