Capital gains tax good for real estate sector, says Actis boss
Actis East Africa Managing Director Michael Turner. FILE
The re-introduction of capital gains tax could boost the real estate sector by reducing the cost of loans, private equity firm Actis has said.
Actis managing director for East Africa Michael Turner said the new levy would raise the Treasury’s tax revenue, helping to ease competition for commercial bank loans between the private sector and the government.
“This cuts two ways. Yes the tax may be detrimental, but on the other hand if the government borrows a lot from the market it sucks liquidity out, and this raises interest rates,” said Mr Turner.
“Real estate is dependent on interest rates being relatively low, and so if without capital gains taxation the government turns to borrowing more from banks it will hurt the sector.”
The Treasury is staring at a Sh359 billion Budget deficit, or eight per cent of the gross domestic product.
The potentially significant revenue from the tax could help to reduce domestic borrowing, which is mainly funded by banks, tending to crowd out the private sector from the loans market.
Actis is a significant investor in local real estate, with several multi-billion shilling projects already finished and others in the pipeline. The PE company is set to begin construction of the 50,000 square metre Garden City Mall on Thika Road next month.
The Treasury has indicated that modalities for levying the tax, including setting the rate and identifying the targeted assets is yet to be formulated.
In his June 13 Budget speech, Treasury Secretary Henry Rotich said the capital gains tax is aimed at squeezing more tax revenue from the rich.
“This (the tax) will allow wealthier members of our society to also make a token contribution toward our national development agenda,” he said.
Programme officer at the Institute of Economic Affairs John Mutua said that while the tax may be opposed by wealthy property owners who hold positions of influence, it is unlikely that it would make the sector any less attractive to potential investors.
The potential of the tax having an effect of reducing government borrowing will depend on the effectiveness of collection and the amount of earnings that the real estate sector generates.
“When you look at how much the construction industry is growing, the tax may jolt people a bit but not much, since they have been making quite a bit of money over the years, and some of the prices charged are quite inflationary,” said Mr Mutua.
The capital gains tax was suspended in 1985, when it was levied at 10 per cent, and both IEA and Actis contend that this would be an optimum rate when the levy is reintroduced.
“If they choose to implement it at the levels in Tanzania and Uganda, of about 30 per cent, that might have a disproportionately negative effect on real estate,” said Mr Turner.
