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September 19, 2018

Real estate sector taxes post mixed performance

KRA Commissioner General John Njiraini.
Photo/FILE
KRA Commissioner General John Njiraini. Photo/FILE

The Kenya Revenue Authority posted mixed fortunes in tax collections from the real estate sector in the first four months of this financial year from July.

It surpassed the Sh150 million target in land rent by 34.67 per cent or Sh52 million for the period through October, the latest statistics shows, raking in Sh202 million.

KRA Commissioner General John Njiraini said the collections in the four months were also 27.7 per cent higher compared to the same period last year.

Landlords are required to pay land rent which is calculated at four per cent of the market value for urban properties and two per cent for agricultural land, mainly in the rural areas.

The levies should be paid by January 31 of every financial year through the National Bank of Kenya.

Failure to remit the rent attracts an interest of two per cent for every month after the deadline.

Until January 2007 when its collection was transferred to the KRA, the levy was being remitted directly to the ministry of Lands.

Land rent is one of the major revenue stream for the KRA from the real estate sector where compliance has traditionally been seen as low.

 

Stamp duty

The performance in stamp duty collections, to which transactions in real property – land and buildings – forms the lion’s share, however, underperformed over the four-month period.

The KRA collected Sh3.88 billion between July and October, its statistics indicate.

The revenues undershot the target of Sh5.51 billion, set by the National Treasury, to the tune of Sh1.63 billion or 29.58 per cent. The collections were also eight per cent lower than the corresponding period of last year.

Stamp duty is also remitted via the publicly traded National Bank, where the state controls a 70.55-per cent stake – 48.05 per cent through the National Social Security Fund while 22.50 per cent is directly held by the Treasury. The levy is calculated at four per cent for the value of the holdings in urban areas and two per cent in rural settings.

A small share of the stamp duty tax is collected from sale of company shares.

 

Capital gains

Targets for the capital gains, reintroduced in January this year after suspension in 1985, also fared below expectations. The tax, charged at five per cent of net proceeds from sale of buildings and land, raked in Sh2.49 billion in four months to October 31.

This was a quarter or Sh840 million less than the Sh3.33 billion target.

The capital gains levy had initially been extended to shares and bonds trading on the Nairobi Securities Exchange. An aggressive lobbying by stock brokerage firms, however, saw this reversed by the Treasury CS Henry Rotich in his budget statement on June 11, after majority of the brokers declined to remit it citing administrative challenges. This left the CGT burden on property owners who are required to pay it together with stamp duty dues.

At the height of debate over the re-introduction of the CGT last year before the Finance Act 2014 was signed into law on September 14, Rotich argued the levy is effective in most countries.

“This is a tax that is everywhere and there is absolutely no reason why we should not have it,” the CS said on September 9, 2014. “Our (five per cent) rate, which will only apply on net gains, is favourable unlike most countries including our neighbours where the rate is between 15 and 20 per cent.”

Uganda charges 30 per cent, Tanzania 20 per cent while the rate in Nigeria [Africa’s largest economy by size] and South Africa – the continent’s most advanced economy – is 10 per cent.

Ghana charges 15 per cent, while Zimbabwe’s and Zambia’s rates, at 35 per cent, top in Africa.

 

Rental income tax

The KRA did not give specific data on performance of rental income – one of its key focus this financial year ending next June – bundling it together with other income taxes category.

The tax agency has simplified the tax administration system for low-income landlords, earning up to Sh10 million annually, who are now required to pay 12 per cent of their gross rental income.

Under the previous complex tax regime, the KRA charged individual landlords a 10 per cent tax on the first net annual rental income of Sh121,968, 15 per cent on Sh236,880, 20 per cent on Sh351,792 while those raking in a net of Sh466,704 paid 25 per cent tax.

The landlords have also been given an amnesty for arrears before end of financial 2012/13.

They will, nonetheless, only qualify if they pay dues for the financial years 2013/2014 and 2014/15 by end of next June.

The KRA said on September 15 it was targeting Sh3 billion additional rental tax from about 20,000 landlords it expects to rope in through an ongoing campaign.

“The aim of this campaign is to encourage landlords who have not been paying tax to declare and voluntarily pay any undisclosed tax,’’ said Njiraini.

The taxman plans to hire real estate agents to withhold and remit tax for the non-compliant landlords especially in the Nairobi’s Eastlands residences. The measure was included in the Finance Act 2015.

State-owned power distributor Kenya Power has also said it was willing to share data on landlords with the tax agency.

“The objective is make sure KRA is able to access landlords who are, by extension, our customers,” managing director Ben Chumo said on October 30. “We should work together because we are parastatals so that the tax bracket is improved to realise more support [to economic growth] from taxpayers.”

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