The Finance Act of 2022 (Finance Act) has amended the Income Tax Act (ITA), by increasing the rate of capital gains tax (CGT) from five per cent to 15 per cent.
The Finance Act stipulates that the increase will take effect from January 1, 2023. In the case of a firm certified by the Nairobi International Financial Centre Authority that invests Sh5 billion in Kenya, and where the transfer of such investment is made after five years, the rate applied shall be the prevailing rate at the time of investment.
CGT is tax imposed on the transfer of property situated in Kenya, acquired on or after January 2015. A transfer of property is said to have occurred with three distinctions.
First, if property is sold, exchanged, conveyed, or otherwise disposed of in any manner (including by way of gift). Secondly, on the occasion of the loss, destruction, or extinction of property. And finally, on the abandonment, surrender, cancellation, or forfeiture of, or the expiration of substantially all rights to property, including the surrender of shares or debentures on the dissolution of a company.
Examples of properties that incur CGT when transferred are land, buildings, securities, and shares. Exempt from CGT are property transfers for the purpose of securing a loan, transfers of assets between spouses, transfers by a creditor for the purpose only of returning property used as security for a debt or a loan, and transfers of shares listed on the Nairobi Securities Exchange.
In truth, the increase in CGT comes as no surprise. For a while now, there have been numerous conversations surrounding the matter. Among the reasons for the increase includes the comparatively higher CGT rates in other East African countries such as Uganda, Tanzania (10 per cent for residents) and Rwanda’s rates of 30 per cent. Kenya’s CGT rate of five per cent was relatively low.
Government could argue that even with the increase, the CGT rate of 15 per cent is still low compared to other African countries. Compare this to South Africa’s corporate CGT rate of 21.6 per cent and individual CGT rate of 18 per cent, Botswana’s individual CGT rate is 25 per cent, and Ghana and Egypt whose CGT rate for non-residents are 25 per cent and 22.5 per cent respectively.
In a Report on the Finance Bill 2022 by the Departmental Committee on Finance and National Planning, a majority of stakeholders proposed that the CGT rate of 15 per cent be reconsidered to a lower value of 10 per cent, citing that Kenya is yet to adopt a mechanism to address inflation adjustment in the increased CGT rate.
Furthermore, the stakeholders argued that the increased CGT rate would have a negative impact on Kenya’s competitiveness as an economic hub and investment destination.
The committee rejected the proposal by stakeholders to reduce the CGT rate to 7.5 per cent, saying that this would have a negative impact on revenue allocation. Notwithstanding that, it agreed and recommended that the CGT rate be revised from 15 per cent to 10 per cent.
Despite these recommendations from the committee and stakeholders, the Finance Act adopted a CGT rate of 15 per cent. The increase will see property owners, developers and investors pay higher tax charges upon the sale of properties. Consequently, the government ranks as the main beneficiary from increased revenue.
Owing to the significant change made, the government could have considered a gradual increase. The 10 per cent increase proposed by some stakeholders was certainly a viable option. This would have cushioned investors in the region who will be massively affected and from whom the 200 per cent increase is likely to elicit strong reactions. This is because a significant portion of capital gains on disposal of properties is often attributed to a general increase in prices due to inflation.
The proposed increase should, therefore, have considered an inflation adjustment (indexation) to arrive at equitable value. In the present context, indexation refers to an adjustment of the asset value to eliminate the effect of inflation using the consumer price index.
However, we do still expect investors to invest in Kenya due to the comparatively lower CGT rate and the ease of doing business in Kenya, for which the country is ranked fourth in the continent.
Not only that, but we should remember that Kenya is considered to be the main economic hub for East Africa and is among the top fastest-growing African economies – so growth is all but assured.
Tax Partner at Cliffe Dekker Hofmeyr (CDH) in Kenya
