Brokers in new legal battle against capital gains tax

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Stockbrokers are seeking a review of Justice Mumbi Ngugi’s judgment that last month struck out their petition against the capital gains tax CGT.
They claim their lawyer Kiragu Kimani discovered the provisions the judge relied on were repealed in 2006 to exempt investment shares.
The CGT will see NSE investors pay a five per cent tax on gains made from any share sale at the stock market.

Stockbrokers have renewed the legal battle against the capital gains tax (CGT) by filing an application claiming that the High Court relied on a repealed provision of the Finance Act to throw out their case.

The Kenya Association of Stockbrokers and Investment Bankers (Kasib) is seeking a review of Justice Mumbi Ngugi’s judgment that last month struck out their petition against the CGT.

Kasib claims its lawyer Kiragu Kimani discovered the provisions the judge relied on were repealed in 2006 to exempt investment shares.

“The provision relied upon by the judge had been repealed by section 26 of the Finance Act 2006 and is therefore no longer in force. After the repeal of section 35(A) and (B) it is not clear under which provision of section 35 members could collect and remit CGT,” Kasib said.

The levy will see Nairobi Securities Exchange (NSE) investors pay a five per cent tax on gains made from any share sale at the stock market.

Kasib wants the court to declare section 35 which relates to CGT unconstitutional, saying it is vague and contradictory.

Justice Ngugi in her judgment said a set of guidelines published by KRA cleared any provisions of the Act that were contradictory, hence upheld the charging of the levy.

Stockbrokers argue that they are caught between a rock and a hard place as collection of CGT will expose them to lawsuits from investors, while failure to charge the levy will leave them at risk of being charged in the criminal court.

READ: Stockbrokers now take tax case to the Court of Appeal

Justice Ngugi after delivering her judgment stopped KRA from implementing the CGT so as to allow stockbrokers a chance to appeal the case.
The lobby says the order lapsed on April 10, and the taxman may seek dues any time unless the court intervenes.

“As a result of the mistake, the court dismissed Kasib’s argument and this places its members at risk of arbitrary criminal prosecution for failure to collect and remit CGT as provided for under the Act,” Kasib added.

Justice Weldon Korir day certified the application urgent, but declined to extend Justice Ngugi’s orders. He ordered Kasib and KRA to file their various responses and arguments before May 4 when they will appear before Justice Ngugi for a hearing.

Mr Kimani had asked the court to extend the interim orders Justice Ngugi granted last month until the court makes a final decision so as to save stockbrokers from the taxman ahead of concluding the case.

“KRA officials are likely to take enforcement action against Kasib’s members before this application is heard and determined,” he said.

The broker’s renewed fight comes two months after the National Treasury shifted the burden of collecting the CGT from stockbrokers to investors. Finance Cabinet secretary Henry Rotich said legislation to confirm the shift is in the works, and should be complete by the next financial year starting July.

The Treasury made the decision after stockbrokers raised concerns over their capacity to collect the tax due to lack of adequate personnel and difficulty in verifying gains made by investors in some transactions.