Understanding kenya capital gains tax

Capital Gains Tax was first introduced in Kenya in 1975 under the Eighth Schedule to the Income Tax Act. At the time, it was payable at the rate of 10%.

On 13^th June 1985, the said provisions were suspended thus discontinuing the charge of Capital Gains Tax in Kenya. In 2006, there was an attempt to re-introduce Capital Gains Tax through the Finance Bill (2006) but the motion to pass the Bill was defeated in Parliament.

The Bill sought to charge Capital Gains Tax at the rate of 10%. Parliament was largely of the view that the tax would increase the cost of land and make housing less affordable to Kenyans. 

Ultimately, in the wake of Kenya’s growing budgetary constraints, Parliament finally approved the Finance Bill 2014 which re-introduced Capital Gains Tax in Kenya. Capital Gains Tax became operational on 1^st January 2015 upon the commencement of relevant sections of the Finance Act 2014.

SCOPE OF CAPITAL GAINS TAX

Under the Finance Act 2014, Capital Gains Tax is charged on the profit acquired by a company or an individual upon the transfer of property effected from 1^st January 2015, whether or not the property was acquired before this date.

It is generally charged at the rate of 5% which is a final tax. Capital Gains Tax is computed on the amount by which the transfer value of the property exceeds the adjusted cost of the property, that is, the profit.

 Transfer value is the buying price for the transfer of the property. Adjusted cost is the costs incurred by the seller in acquiring the property. ­DUTY TO PAY The responsibility to pay Capital Gains Tax is generally on the transferor, that is the seller.

However, under the Income Tax Act, the responsibility to collect and account for the Capital Gains tax accruing upon the transfer of investment shares is on the stockbrokers.

In the case of transfer of discountable securities like Commercial Paper and Treasury Bills, the tax will be collected and accounted for by the Central Bank of Kenya. Capital Gains Tax will be paid through Commercial Banks into a given account held at the Central Bank of Kenya for all transactions chargeable to the tax.

PROCEDURE FOR PAYMENT OF CAPITAL GAINS TAX

The KRA Capital Gains Tax Guidelines outline the procedure as follows; -

1.    The transferor or stock broker, as the case may be, completes a declaration form (CGT form) prescribed by KRA. The forms comprise of a self-assessment to determine the gain upon which Capital Gains Tax will computed.

2.    The computations are verified by the Commissioner of KRA.

3.    The declaration form is accompanied by:

• A Copy of Sale/Transfer Agreement of the property;
• Proof of the incidental costs related to the acquisition and transfer of the property;
• A copy of the title deed or ownership document for the property; and
• A report from a registered valuer for property transactions between related parties.

COURT CASE

In January 2015, the Kenya Association of Stock Brokers (Kasib) filed a suit against KRA seeking to suspend the laws providing for Capital Gains Tax citing challenges in implementation. Firstly, Kasib claims that there is uncertainty as to the rate payable as capital gains tax upon the transfer of investment shares.

Part II of the Eighth Schedule of the Income Tax Act states that the rate of 7.5% is to be charged. On the other hand, the Finance Act 2014 states that the rate of 5% is to be charged.

The Finance Act does not amend or repeal the rate stated in the Income Tax Act hence causing uncertainty as to the applicable rate. Secondly, Kasib is dissatisfied with the clause under the Income Tax Act that places the obligation to pay Capital Gains Tax accruing on the transfer of investment shares upon stock brokers.

In its petition, Kasib states that only 19 firms are licensed to act on behalf of investors in the securities exchange. Expecting these firms to calculate taxes due for over 3000 transactions daily is overly burdensome.

Accordingly, Kasib proposes that Capital Gains Tax should be paid by investors directly as part of income tax. Thirdly, Kasib alleges that KRA is exceeding the requirements set out in the Income Tax Act in further placing the responsibility to calculate the amount of Capital Gains Tax payable upon the stock brokers.

Fourthly, Kasib argues that the Income Tax Act is archaic in inferring that stock brokers were involved in the transfer of shares. It states that this responsibility has since been passed on to the Central Depository and Settlement Corporation.

Lastly, the Kasib argues that stock brokers should not be responsible for facilitating the payment of Capital Gains Tax by foreign investors who do not have KRA PIN numbers thus causing practical difficulties.

In response, KRA argues that Capital Gains Tax should be implemented to remedy the loophole that allowed people to use securities exchange to evade taxes. KRA also argues that the concerns expressed over calculation of Capital Gains Tax by stock brokers on behalf of their clients were merely administrative and can be resolved as the new laws continue to be in effect.

KRA and Kasib were involved in out-of-court negotiations for settlement. Unfortunately, the talks collapsed. Accordingly, Kasib’s petition is being heard in court before Mumbi J.

There are prevailing uncertainties concerning the practical modalities for the collection of capital gains tax in Kenya. Legitimate concerns as to their implementation have been raised as briefly noted in this article.

 KRA is making efforts to resolve these problems. In the coming months, KRA’s efforts will continue to be subject to public scrutiny. Concerns have also been raised on the potential impact of capital gains tax on Kenya’s economy with factions expressing concern that the tax will substantially inflate property prices.

Market analysts predict distress in the economy because of the re-introduction of the tax. Considering that Kenya charges capital gains tax at possibly the lowest rate in Africa, the legitimacy of these concerns can only be verified with certainty in the future.