TAX REGIME

Let CGT be indexed if it increases to 15%

In Summary

• Government wants to increase Capital Gains Tax from five to 15 percent

• Presently there are no allowances for annual inflation to reduce the taxable amount for CGT

Image: OZONE

The new Income Tax Act proposes to increase Capital Gains Tax from five percent to 15 percent.

CGT taxes the profit made on an investment so real estate companies, manufacturers and investors are up in arms about this proposal.

The global reality is that five percent is a very low rate for CGT. In the UK it is 30 percent and in Uganda 40 percent. Arguably, this low rate of CGT attracts investors to Kenya and should be retained.

However, if CGT is increased to 15 percent, then annual allowances should be introduced. If you bought a piece of land in 1970 for Sh10,000, that was a lot at the time but virtually nothing today. But you would still pay effectively 15 percent CGT on the entire sale price.

Indexation or allowances adjust upwards the original price by the official rate of inflation since the year of purchase to make CGT fairer. The seller therefore pays CGT only on the real profit of the transaction, not the nominal profit.

If the rate of CGT has to be increased, it is only fair to introduce indexation or allowances at the same time.

Quote of the day: “It is never too late to be wise."

Daniel Defoe
The English author was imprisoned for seditious libel on May 21, 1703

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