The High Court has ruled in favour of the Kenya Revenue Authority (KRA), overturning a Tax Appeals Tribunal (TAT) decision that had allowed a local consulting firm, RSM Eastern Africa LLP (RSM), to claim input VAT on taxi services used during its business operations.
In a judgment delivered on 20th May 2025, the Court found that RSM was not legally entitled to deduct input VAT for the hiring of passenger vehicles, as it does not operate in the business of selling, leasing, or hiring such vehicles – a clear requirement under the VAT law.
The ruling stems from a 2018 tax audit by the Commissioner of Domestic Taxes, which uncovered inconsistencies in the firm’s VAT records.
The Commissioner initially assessed VAT arrears for April 2018. This amount was later reduced following an objection raised by RSM.
However, a dispute arose over whether RSM could deduct input VAT for taxi services it hired during the period. The Tax Appeals Tribunal had earlier sided with the firm, stating that because the taxis were used to further the firm’s business, the VAT should be deductible.
KRA appealed the Tribunal’s ruling, arguing that under Section 17(4) of the VAT Act, only businesses exclusively involved in selling, dealing in, or hiring passenger cars or minibuses can claim input VAT on such vehicles.
The Commissioner stressed that RSM, being an audit and consultancy firm, does not meet that threshold.
The Court agreed with KRA stating that tax laws must be interpreted strictly and according to their plain meaning. She noted that the word “exclusively” in the VAT Act means input VAT deductions on passenger vehicles are reserved only for businesses whose sole or main activity involves the sale, lease, or hire of such vehicles stating as follows;
“The respondent failed to show that it was in the business of hiring or selling vehicles on a continuous and regular basis. Therefore, the deduction claimed was unlawful.”The Court reaffirmed the principle that intention or convenience cannot override clear statutory language in tax matters.
“The law is clear. It does not matter whether the taxi hire supported business activities. What matters is whether the taxpayer is in the exclusive business of vehicle leasing or sales,” the court explained.The Court set aside the TAT’s decision and upheld KRA’s objection, effectively disallowing the input VAT claim by RSM. The Judge did not award any legal costs, signaling that each party would bear its own expenses.
The ruling is a significant win for the Kenya Revenue Authority as it seeks to tighten compliance and close loopholes in VAT deductions by professional services firms.
This decision reinforces the strict interpretation of tax statutes in Kenya and is expected to guide future disputes where businesses attempt to claim input VAT outside the allowed scope.
