Property, land dealers to pay more in proposed 15% tax

Industry players have however warned the increase will discourage investments.

In Summary

•The proposal is punitive and will likely affect mergers and acquisitions and investments in the construction industry, Kenya Association of Manufacturers says.

•The Kenya Property Developers Association (KPDA) has also termed the increase “steep” and would reduce the number of transactions in real estate.

You will pay twice more in terms of taxes on property sold if the proposed increase on Capital Gains Tax in the Finance Bill 2022 is adopted as it is.

National Treasury is seeking to increase Capital Gains Tax from the current five per cent to 15 per cent, effective January 1, 2023, as it seeks to boost revenue collections by the Kenya Revenue Authority (KRA) which has been given a higher target in the Financial Year 2022/23.

The taxman is expected to collect Sh2.14 trillion equivalent to 15.3 percent of GDP, up from the Sh1.8 trillion for the current fiscal year ending June 30.

Capital Gains Tax is charged on gains accrued from the transfer of property buildings, land, or shares in Kenya.

This is the second time the proposed increase has been made after the first attempt in 2019, when Treasury had sought to increase the tax rate to 12 percent.

The move was however, again, been opposed by investors and developers.

They have asked the government, in the second attempt, to retain the CGT at the current rate, as the proposed increase translates to a 200 per cent or a threefold increase.

Sector players say this is a drastic increase in less than one year, as the clause becomes active on January 1, 2023.

“The proposal is punitive and will likely affect mergers and acquisitions and investments in the construction industry,” the Kenya Association of Manufacturers, whose members are big investors in assets, says in a memorandum to Parliament.

Instead, the government should consider introducing an inflation adjustment (indexation) to arrive at the equitable acquisition value of the property instead of increasing the CGT rate, it says.

“This also goes against the canon of certainty in taxation. It is undesirable because indexation allowance relief is not allowable as an expense in disposing of assets. We, therefore, propose the retention of capital gains tax at five per cent,” KAM chief executive Phyllis Wakiaga notes.

The Kenya Property Developers Association (KPDA) has also termed the increase “steep” and would reduce the number of transactions in real estate.

This means KRA could end up tapping on fewer transactions.

“This move is increasing the cost of doing business. What the government needs to do is instead of focusing on property owners and the traditional revenue sources, it should expand its tax base,” Gikonyo Gitonga, director at KPDA, told the Star on the telephone on Friday.

Private Equity funds have also been against an increase in the CGT, arguing it will discourage investments.

According to the East African Venture Capital Association (EAVCA), any increase will be punitive and will put off investors, yet the real estate sector is critical in attaining the Big Four Agenda’s affordable housing arm.

“PE funds are key in supporting investments in the country. We need to make Kenya an attractive investment destination,” EAVCA said.

The Capital Markets Authority (CMA) has previously also advised against increasing the Capital Gains Tax, noting it would create uncertainty in the tax policy environment affecting middle to longer-term Private Equity investment appetite in the country.

KRA however exempts from CGT capital income that is taxed elsewhere as in the case of property dealers, issuance by a company of its own shares and debentures, transfer of property for the purpose only of securing a debt or a loan, and transfer by a creditor for the purpose only of returning property used as security for a debt or a loan.

Transfer by a personal representative of any property to a person as beneficiary in the course of the administration of the estate of a deceased person is also exempt.

Others are transfer of assets between spouses, transfer of assets between former spouses as part of a divorce settlement or a bona fide separation agreement, or transfer of assets to immediate family, company where spouses or a spouse and immediate family hold 100 per cent shareholding and private residence.

This is if the individual owner has occupied the residence continuously for the three-year period immediately, prior to the transfer concerned.

CGT is due on or before transfer of property but not later than the 20th day after the transfer.

During his 2022/23 budget speech, National Treasury CS Ukur Yatani said the government is developing a Medium-Term Revenue Strategy to boost tax revenues, improve the tax system and link taxation to the country’s development needs over the medium term.

The CGT, which is among other tax measures being implemented, is aimed at rising revenues to fund the Sh3.3 trillion budget for the Financial Year 2022/23.

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