- Kenya looks to capital gains tax to shore up tax revenue
As we approach the start of a new year, all is set for Kenya to triple capital gains tax from Jan. 1 2022. This has brought about anxiety about its eventual implementation by the Kenyan Revenue Authority, KRA.
Starting on January 1, the KRA will begin a nationwide collection of 15% tax on capital gains.
Kenya to Triple Capital Gains: Background
Before the August 9 2022 General Election that saw the emergence of President Ruto, the Kenyan Parliament through the tax administration had approved a triple increment in the rate of tax imposed on earnings from the sale of land, houses, and quoted shares.
The capital gains tax which was initially set as 5% will now be charged at a rate of 15% starting from its January 1st commencement.
In effect, experts are predicting that the move will affect Kenya’s real estate investments and private equity deals.
A Perspective on Capital Gains Tax in Kenya
To break it down, a capital gain is a difference between the cost of acquiring an asset and the price that it is eventually sold for.
Capital Gains Tax (CGT) is a tax imposed on the profits that investors make when they sell or give away assets such as land or building.
The tax is usually charged on the profit made after removing expenses such as upgrade fees, legal fees, and mortgage interests.
In the mid-1980s, CGT was removed in Kenya, as a way to attract investments.
Aim of the tax increase
As the tax rate begins to apply, the government hopes that the increment will help generate higher tax revenues to help fund the Sh3.3 trillion budget.
The tax increment was approved as part of the government’s efforts to generate revenue for development projects that will facilitate economic growth and ensure employment opportunities.
Effects of Covid-19 on Capital Gains Tax
The tax increment is happening at a time when the prices of homes in Nairobi and land costs in satellite towns around the capital have surged due to resuscitated demands from buyers who had initially put the brakes on acquisitions at the time the pandemic was causing serious hardship.
During the advent of the pandemic, one of the sectors mostly felt the impact was Real Estate, as people were not looking to buy houses, due to retrenchment, income losses, and investors’ decision to keep their money as they navigated the economic uncertainty.
As a result, paying the higher capital gains tax might be a challenge for investors.
The Treasury’s perspective
According to the Treasury, an amount of Sh16.7 billion was generated from capital gains tax in the year to June 2022.
The Treasury had initially revealed that compared to other countries that impose up to 30% capital gains tax, Kenya is charging a reasonable capital gains tax rate.
It cited the example of Tanzania which charges a capital gains tax of 30%, and Uganda which imposes a capital gains tax of 20% for foreign-owned firms and 10% for firms owned by locals.
The Implication of the Tax Increase
One of the implications of this increment is that it will cut the profit realized by people selling land, buildings, and company shares outside the Nairobi Securities Exchange (NSE) and also intangible assets such as software and business goodwill.
Properties Exempt from Capital Gains Tax
According to the information provided by the Kenya Revenue Authority (KRA) website, exemptions are currently offered on the following:
- The sale or discarding of property is meant for managing the estate of a late person.
- Land sales of an amount that is below Sh3 million by individuals.
- A private home that the owner has inhabited consistently for three years immediately before the sale or disposal.
- The transfer of property between spouses as part of their divorce settlement.
Criticism of the Tax Increase
Despite the government’s explanation of the rationale behind the tax increase, some have still criticized it, claiming that it doesn’t take into consideration the fact that some of the gains made from the sale of properties might be due to inflation.
The implication of this is that the profits earned by investors in the absence of inflation might not be sufficient for them to pay the higher rate of capital gains tax.
According to analysts, the failure of the Treasury to initiate rules that would enable the adjustment of the buying price for inflation is exposing investors to high tax charges.
It was also mentioned that the enforcement of such a high tax could potentially discourage foreign investors.
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