APPEAL TO HOLD TAX RISE

Tax on transfer of property faces obstacle with claims of double taxation

The proposal to increase Capital Gain tax from the current five per cent to 12.5 per cent will lead to reduced income by people selling land, buildings and securities

In Summary

•In a memorandum by Patrick Maina Nderitu, Hedrick Masaki Omanwa and Romano Wachiye to the Finance Committee of National Assembly, the three have said the tax on gains from sales of assets will discourage investments as it effects a double-tax.

•They claim the administrative challenges have resulted in numerous court cases filed against KRA by Kenya Association of Investment Banks, Kenya Bankers Association and Law Society of Kenya.

Owners of the 100 acres Njiru farmers company view an original copy of the land map
Land woes: Owners of the 100 acres Njiru farmers company view an original copy of the land map
Image: Stanley Njenga

The proposal to increase capital gain tax to 12.5 per cent levied on the transfer of property has faced a hurdle, a month away to its implementation.

In a memorandum by Patrick Maina Nderitu, Hedrick Masaki Omanwa and Romano Wachiye to the Finance Committee of National Assembly, the three have said the tax on gains from sales of assets will discourage investments as it effects a double-tax.

The tax proposes an increase in the rate from the current five per cent to 12.5 per cent and is expected to contribute Sh37 billion worth of new revenue to the current financial year.

It is also expected to lead reduced income by people selling land, buildings, securities and intangible assets.

They said the tax will tend to be deceptive as a large component of the gain is due to an inflationary price increase for assets held over many years.

“Property investors feel that the income earned to make the investment was already subject to a tax,” the memorandum said.

In the fiscal year 2018/2019, Kenya Revenue Authority estimated to have collected Sh1.9 billion, an equivalent of Sh160 million per month, from CGT against and annual target of Sh6.9 billion.

The three petitioners said the records on acquisition costs and other allowable expenses on properties subject to CGT were not well preserved.

They claim the administrative challenges have resulted in numerous court cases filed against KRA by Kenya Association of Investment Banks, Kenya Bankers Association and Law Society of Kenya.

They added that the contentious matters are lack of public participation before introduction of the law, responsibility for payment of CGT on auctioned properties by banks and simultaneous payment of stamp duty and CGT.

“Give its very low-performance rate on tax revenue, it is, therefore, a distort tax with numerous administrative exemptions,” it added.

We recommend it be held at the current level until the above.” 

They also said that it is a “voluntary” tax, therefore only when a taxpayer chooses to dispose of assets may tax be payable in respect of those assets.

In its four years of implementation, the tax has been exempting areas such as sale of land whose transfer value is less than Sh3 million, sale of agricultural land outside a municipality or gazetted townships of less than 50 acres.

Transfer of securities listed on the Nairobi Securities Exchange are also exempted.

Private equity investments, are not levied CGT as most of the funds are based in Mauritius, which already has a double taxation treaty with Kenya and also does not levy CGT.

If the tax get parliament approvals given that it is one of the proposal in the finance bill 2019, it will also exempt transfer of property that is necessitated by corporate entities restructuring their operations for efficiency and market penetration.

“CGT tax revenue benefit to the government is most times outweighed by the disadvantages of imposing CGT unless the government introduces numerous exemptions and thus never realises the tax revenue targeted,” they added.

The tax was introduced during the presentation of Budget statement for the 2019/2020 with National Treasury cabinet secretary Henry Rotich with the aim to promote equity in taxation by ensuring fair sharing of the tax burden.

Rotich also said the review would harmonize the rate with other jurisdictions, including the East Africa Community region, where the rate ranges from 20 per cent to 30 per cent.

Kenya has the lowest rate in the region compared to countries such as Uganda, South Africa, Nigeria and Mauritius with 30 per cent, 40 per cent, 10 per cent and 0 respectively.

CGT was first introduced in 1975 and then suspended in 1985 to attract investment in both real estate and stock market and facilitate growth in property market.

It was however, reintroduced in 2006 but the proposal did not succeed.

The successful attempt was made in 2014 via the Finance Act, proposing the CGT at a rate of 5 per cent effective from January 1 2015.