The government will from next week triple the capital gains tax resulting from gains through sale of land, houses and unquoted shares to 15 percent from the current five percent, hitting Kenya’s real estate investments and private equity deals.
Parliament approved the increase before the August 9 General Election, and allowed the Kenya Revenue Authority (KRA) to start collecting the higher taxes from January 1.
This will lead to reduced income by people selling land, buildings and company shares outside the Nairobi Securities Exchange (NSE) as well as intangible assets such as software and business goodwill.
The five percent CGT was reintroduced in 2014 and the government hopes that the latest move will result in higher tax revenues to help in financing the Sh3.3 trillion budget.
Capital gains tax, which Kenya dropped in the mid-1980s to attract investments, is the levy investors pay on the profits — or gain — made when they sell, give away or dispose of an asset, such as shares or property like homes and land.
The tax is paid on the gain – or profit – investors make after excluding costs associated with the property such as upgrade, legal fees and mortgage interests and not the value of the asset itself. The property levy is supposed to help widen the tax base, and help the Treasury cut its appetite for debts in the middle of the push to cut State expenditures.
Kenyan government is trying to raise funds for development projects to spur economic growth and create jobs, but analysts say such taxes could deter foreign investors.
“Real estate is the key attraction for capital gains tax. The other ones that would be of interest to KRA are all these investments and divestitures,” said Robert Waruiru, a Partner in charge of Tax & Regulatory at Ichiban Tax & Business Advisory.
The higher tax comes as home prices in Nairobi and land costs in satellite towns around the capital have risen to new highs on the back of renewed demand from buyers who had slowed down acquisitions at the peak of Covid-19 economic hardships.
Real estate was among the worst-hit sectors by the economic fallout of the pandemic as orders by new house buyers dried up, largely due to income and job losses, cautious lending by banks, and investors choosing to keep their cash in hand as they rode out the economic uncertainty.
The sector had been one of Kenya’s fastest-growing in the decade to 2015, with returns outpacing equities and government securities.
The Treasury says it collected Sh16.7 billion from capital gains tax in the year to June 2022.
The Treasury has previously said some countries, including East African neighbours, had much higher rates of capital gains tax at 20-30 percent.
Tanzania charges a capital gains tax at 20 percent for foreign-owned firms and 10 percent for residents.
Uganda has a capital gains tax of 30 percent while nearby Mauritius does not tax capital gains.
Audit firm Ernst and Young reckon that tripling the tax will affect capital investments despite the rate being the lowest in the region.
Information available on the KRA website shows that currently, exemptions are also offered on disposal of property meant for administering the estate of a deceased person or transfer of property between spouses as part of divorce settlement.
In addition, a private residence where the owner has occupied the house continuously for the three-year period immediately prior to the transfer is exempt.
A blog in the KRA website also indicates that land sales of less than Sh3 million by individuals are immune to the tax. The higher capital gains tax has been criticised for not taking into account that some of the capital gains might be due to inflation.
Analysts reckon that investors paying capital gains tax have once again been left exposed to high tax charges after the Treasury failed to introduce rules that would allow adjustment of the buying price for inflation.
“In the region, there are all these capital gains taxes but we do not have indexation allowance to take care of gains due to inflation,” said Nikhil Hira, a partner at Kody Africa LLP, an audit and accountancy firm.
Credit: Source link