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Why developers are worri*d over 12.5pc capital gains tax

Friday, August 23rd, 2019 00:00 | By
Housing investment. Photo/Courtesy

Real Estate developers have raised a red flag over the government’s intention to raise Capital Gains Tax (CGT) from five per cent to 12.5 per cent, saying the move will further dampen the property sector.

Faced with no other option, the investors are likely to pass over the tax to buyers of houses and land, making the properties expensive and out of reach for purchasers.

Already, the property sector in the country is in distress, as witnessed mid this month when listed mortgage lender, Housing Finance subjected to the hammer, customers houses worth Sh2.5 billion.

In its second quarter Housing Market Index, Kenya Bankers Association (KBA), blamed the slump in the property market to among other factors lack of credit.

“The limited availability of funding to the housing market has been on the back of increased levels of non-performing loans,” KBA explained.

In his Budget Statement for the financial year 2019/20, suspended National Treasury Cabinet Secretary, Henry Rotich said there was need to review CGT legislation after four years of implementation.

This, he added, was in order to enhance equity and fairness as well as harmonise the rate with other jurisdictions, including East Africa Community region, where the rate ranges from 20 per cent to 30 per cent.

“Consequently, I propose to increase the rate of Capital Gains Tax from five per cent to 12.5 per cent,” Rotich said in his Budget Statement in June.

However, stakeholders within the sector are of the view that CGT has not been successful in Kenya, 40 years down the line for several reasons.

A memorandum presented to the National Assembly Finance Committee members yesterday by independent financial and tax consultants and seen by the Business Hub lays bare a litany of administrative challenges against the CGT, including lack of preservation of records on acquisition costs and other allowable expenses on properties subjected to CGT.

Distortive tax

“Given its very low performance rate on tax revenue, it is thus a distortive tax with numerous administrative exemptions,” the memo, signed by Patrick Nderitu, Hendrick Omanwa and Romano Wachiye states. 

Indeed, the administrative challenges have resulted in numerous court cases filed against Kenya Revenue Authority (KRA) by Kenya Association of Investment Banks, KBA and Law Society of Kenya.

The suits were premised on the fact that there was lack of public participation before the introduction of the law, responsibility of payment of CGT on auctioned properties by banks and the simultaneous payment of stamp duty and CGT.

In staking their claim for the tax to remain at five per cent, the memo says studies show CTG tax revenue benefit to the government is in most times outweighed by the disadvantages of imposing it unless the government introduces exemptions and thus never realise the tax revenue targeted.

The memo adds that a tax on capital gains inappropriately taxes illusive income, since a large component of the “gain” is due to inflationary price increase for assets held over many years.

Property investors also feel the tax on gains from sales of investment assets amounts to double–tax, as income earned to make the investment was already to income tax. 

The Institute of Certified Public Accountants of Kenya also made submissions and advised against raising the Capital Gains Tax.

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