DEAD END

Treasury bid for higher capital gains tax flops

Treasury proposal was to raise the tax from five to 12.5 per cent

In Summary

• MPs say the move would negatively affect President Uhuru Kenyatta’s affordable housing plan in the Big Four agenda.

• Government sought to enforce the tax in order to decrease its dependence on borrowing to fund projects.

The National Treasury building
The National Treasury building
Image: FILE

The government’s bid to collect Sh4.4 billion annually from real estate developers has hit a snag after Parliament expunged from the Finance Bill (2019) provisions that would have enabled it charge the tax.

MPs shot down the proposal to increase the Capital Gains Tax from the current five per cent to 12.5 per cent, monies which the National Treasury sought to help reduce the country’s debt.

Their argument is that the move would negatively affect President Uhuru Kenyatta’s affordable housing plan in the Big Four agenda.

 
 

The President’s development blueprint says the government intends to reach a target of 500,000 affordable housing units.

Those opposed to the increased capital gains tax say it would result in an increase in land prices, hence push the cost of houses higher.

The Finance Committee chaired by Joseph Limo (Kipkelion East) has instead sought to exempt investors in the affordable housing scheme from restrictions of borrowing beyond their capital.

This shall apply to loans advanced to the company by a non-resident associate of the non-resident company controlling the resident company.

Government's attempt to tax employees 1.5 per cent of their basic salary flopped after the courts stopped the move, defeating its intended primary funding source to deliver the housing plan.

But the government put a fight to have the proposal retained, with Majority leader Aden Duale arguing that Parliament must raise revenue to decrease government’s dependent on borrowing to fund projects.

The Garissa Township MP opposed the amendments to the Bill, which were drafted by Treasury CS Henry Rotich before he was suspended over graft allegations.

 
 

“This is going to affect the big landowners. I want the chairman to agree with the National Treasury on the increase. Unless he convinces us that he will recover, the amendment should be dropped,” Duale said.

“Last year, when we removed fuel, it had to affect our CDF. Today we are very careful. We don’t want to have a gap that will affect us,” Duale said.

Treasury proposed the increment “to enhance equity and fairness as well as harmonise the rate with other jurisdictions” having studied the tax regime for four years.

THE RICH SHOULD BE TAXED MORE

Kitui Central MP Makali Mulu, an economist by profession, also supported the increase, saying the rich should be taxed more and the monies expended on road and health projects.

“One of the principles of taxation is what we call progressive taxation. That is where you tax the rich to empower the poor. What is happening in the Capital Gains Tax here is exactly that. Good practice.”

The lawmaker argued that it is not every Kenyan who buys a house, buys and transfers land, hence no harm imposing the tax.

“To me, even though the increase seeks to be higher, I think it is in line with good practice in taxation,” Mulu said.

But their colleagues differed with the assertions, with Funyula MP Wilberforce Oundo supporting the amendment, saying while it might be desirable to increase the tax, the timing is wrong.

“The real estate market is doing so badly. The increase will reduce the absorption and purchase of houses. In a country where we don’t account for inflation, increasing would mean we will be taxing capital gains at 20 per cent,” Oundo said.

Kitutu Chache’s Jimmy Angwenyi said the tax measure contradicts Uhuru’s Big Four agenda, adding that Parliament is to blame for increased debt, which was ground for the increase in capital gains.

“We cannot charge Kenyans more taxes to pay debts that we don’t know what they are used on,” the MP said, remarks backed by Kajiado South MP Joseph Manje who said it would deplete the gains made in the real estate sector.

“We need to re-look at it. If we need money from capital gains, then we can re-visit taxing NSE,” Kitui Rural MP David Mboni added.

MPs also blocked Treasury from implementing tax measures that would have affected web-based vendors, lawyers, and professional cleaners.

Banks were also dealt a blow in their bid to remove the interest rate cap with lawmakers maintaining the entities have remained profitable despite the caps.

Also hampered is an effort by the Treasury to compel lawyers to report to authorities the amount of money they handle on behalf of their clients.

LSK raised concerns that the measures amounted to a breach of advocate-client relationship or professional privilege applicable to lawyers.

The defeat of the capital gains tax could come as a relief to real estate developers who are currently struggling to get loans in the face of the interest rate caps.

The caps have been retained in the Finance Bill, 2019, despite an attempt by the National Treasury to have them removed for stifling growth SMEs.

Players in the real estate sector reason that since it is capital intensive, developers need cheap and accessible credit to be able to make meaningful investments.