Clubs organised and operated exclusively for pleasure, recreation, and other nonprofit purposes should not pay Value Added Tax (VAT) on membership and entrance fees.
In an income tax appeal case by the Commissioner of Domestic Taxes against Sigona Golf Club, Thika Golf Club, Kiambu Club Limited, Ruiru Sports Club, and Kenya Golf Federation, the court ruled that membership fees and assessment dues are sources of income from which tax liabilities may accrue is misplaced.
Appellate Judge Nixon Sifuna distinguished between the term “capital,” which means the fund, and the term “income,” which refers to the flow of services rendered by capital and is further defined as profit or gain.
Applying this distinction, the court said that membership fees, assessment dues, and other fees of a similar nature only constitute contributions to the maintenance and operations of the facilities and services offered by recreational clubs to their members.
"They are not paid as consideration for services or goods purchased but instead, are utilised as funds for the upkeep of the club facilities and retention of membership in the club."
"As for VAT, the membership fees and assessment dues do not involve the sale of goods or services. Since there is no economic activity involved in the collection in the absence of a sale, VAT is not imposable."
The taxman had challenged a March 27, 2020 ruling by a Tax Appeals Tribunal that upheld the clubs' objection and set a side demands seeking VAT on membership fees since 2017.
KRA had argued that in 2016 and 2017, it undertook a compliance check on respondents which established that they were not charging VAT on club entrance fees and membership subscription fees.
In their defense, the clubs said they were exempt from VAT by dint of Paragraph II part II of the first schedule of VAT Act 2013 in terms of Public Notice No.20 0fb 2001 that exempted them.
However, KRA countered that the said notice was issued under legislation that was later repealed in the Value Added Tax Act (CAP 476 Laws of Kenya), which provided for the exemption of entrance fees and subscription fees from VAT.
Even so, in the ruling made on July 11, the court said those fees only form part of the capital from which no income tax may be collected or imposed.
"Funds in the form of capital are to be distinguished from fees as consideration for the clubs’ services and other income-generating facilities like bars, restaurants, and accommodations that constitute income or profit,'' the court ruled.
Moreover, imposing income tax on these membership fees and assessment dues is arbitrary and confiscatory because these are capital and not income.
The Judge therefore stayed the ruling by the Tax Tribunal asking all parties to cover their legal costs.
The ruling aligns with a similar one made in several jurisdictions across the World, with the Supreme Court in Philipines blocking the Bureau of Internal Revenue (BIR) from collecting VAT on membership and subscription fees from clubs.
The country's top court ruled that those fees are not paid as consideration for services or goods purchased but instead, are utilised as funds for the upkeep of the club facilities and retention of membership in the club.
Yesterday, a top official of one of the leading golf clubs in Nairobi who requested to remain anonymous not to be seen commenting on legal proceedings hailed the ruling as progressive, saying that allowing VAT to apply on registration would have amounted to double taxation.
"Registration or subscription is not a service fee. Why impose VAT to welcome members who are going to spend on VAT-related products and services? That would have amounted to chasing away our customers,'' he said.
"We should say no to taxes on top of taxes if we want to cultivate a sound business environment."