Capital Markets

Capital gains tax hits trading as KRA stands firm

Trading at the Nairobi Securities Exchange has declined sharply as investors take a back seat to see how the new capital gains tax (CGT) will be implemented.

The implementation of the capital gains tax on share transactions has become controversial, as stockbrokers claim that they are not legally obligated to collect the levy on behalf of the taxman.

The Kenya Revenue Authority (KRA), however, sought to turn the heat on the brokers Tuesday by warning that they will be liable for any taxes that they fail to collect since the tax became effective on January 2, the first trading day of the year.

READ: NSE brokers not deducting capital gains tax

“Activity has been slow. We have fewer sellers and buyers who seem not to be decided (as they are not) clear on the capital gains tax,” said Bob Karina, the managing director of stockbrokerage firm Faida Securities.

Tuesday shares worth Sh533 million were traded at the NSE, which is less than a third of the average daily turnover transacted last month.

The capital gains tax was re-introduced at the beginning of this year after a three-decade suspension.

Investors who sell shares at the bourse will pay a five per cent tax on the difference between the acquisition price of a stock and the selling price less transaction costs.

The levy also applies to transactions involving other property such as land, treasuries and private equity.

Mr Karina noted the tax, which was frozen in 1985, is not much but had generated some resentment especially because its calculation and submission to the taxman is not clear.

The Treasury re-introduced it to help finance a Sh1.8 trillion budget which is heavy on infrastructure and social spending.

The Capital Markets Authority (CMA) has sought to mediate on the matter by calling for a report on the challenges faced by the brokers in the implementation of the levy to be forwarded to the taxman.

“The Authority has received various enquiries on applicability of above to ensure full compliance. So that we can seek clarifications from KRA and probably a joint forum where the challenges can be addressed, we wish to request the market players to identify the challenges being faced since the re-introduction of CGT and also suggest possible considerations for solutions,” reads a letter by the CMA seen by the Business Daily.

Stockbrokers have attributed the prevailing confusion to vague guidelines on the implementation of the levy by the taxman and contradictions between the Income Tax Act and the KRA guidelines.

READ: Why brokers want KRA to suspend capital gains tax

“The guidelines and the law (Act) are in conflict. While the law says the broker is the one to collect and remit the tax, the guidelines place the burden on the taxpayer. We are waiting for guidance on the way forward about that,” said Willy Njoroge, the CEO of the Kenya Association of Stockbrokers and Investment Banks.

Mr Njoroge was referring to the guideline that states: “The taxpayer will do a self-assessment to determine the gain upon which tax is computed. The computations are subject to Commissioner’s confirmation of correct gain as the basis of tax computation.”

James Ojee, deputy commissioner at the KRA’s policy unit, however, said the association was merely splitting hairs, adding that the taxman had issued enriched guidelines which clarified matters previously raised by the brokers.

“The responsibility is on the stockbroker. The trading process is all computerised and the Act talks of if the agent does not withhold the commissioner will collect from the agent as if it was his liability,” said Mr Ojee.

Settlement of transactions conducted on the first day of trading of the year were due Tuesday, with stockbrokers stating that they had issued in full some of the cheques due to investors who had sold shares.

The KRA issued new guidelines Tuesday evening which define the acquisition price to be used in calculating the gains. For shares bought after 2005, the applicable prices are those captured by an investor account statements issued by the Central Depository System.

READ: Lapsset land sellers escape capital gains tax in new KRA rules

For shares bought between 2005 and 1998, the purchase price will be assumed to be the highest prices recorded by the specific counter that year as recorded by the NSE. Shares bought prior to 1998 will be assumed to have been acquired at the highest price recorded in 1998.

By using the highest price to calculate the net gain, the KRA said it was reducing the liability of most investors thus it did not have to make adjustments for inflation.

The KRA also said that the principle of first-in-first-out will be used for investors who have slowly accumulated a pool of shares in one counter. This implies that shares sold by such an investor will be assumed to have been the first batch he or she acquired and the price at the time of the first purchase will be applicable.

The tax is to be submitted every 20th day of the month.