Capital gains tax looms as Treasury commits to IMF

The Treasury has committed to the IMF its plans to re-introduce the controversial capital gains tax, in the clearest indication yet that the new levy could come into effect next year.

Treasury Secretary Henry Rotich announced the government’s intention to re-introduce the tax in this year’s Budget speech, but later clarified that new laws had to be passed to facilitate its implementation.

A report by the International Monetary Fund (IMF) released earlier this month reveals Mr Rotich’s commitment to the international lender that the capital gains tax will be re-introduced nearly three decades since it was scrapped.

“In addition, the Income Tax Act will be amended to broaden its base to include capital gains and earnings from gambling,” says the IMF report.

The Treasury this year pushed through the unpopular VAT Act, which saw a sharp increase in prices of basic commodities. The government has been under pressure to raise more revenue to keep up with the ever-soaring national Budget.

Gamblers will also not be spared in the expected review. A PwC report released last month projected that Kenyan casinos are set to earn Sh1.7 billion ($20 million) this year, which will more than double to Sh2.8 billion by 2017, a rosy outlook that may have caught the taxman’s eye.

“I propose to amend the Income Tax Act so as to impose withholding tax on winnings from gaming and betting. This measure should make the winners to equally contribute towards the Exchequer,” said Mr Rotich in his June Budget Speech.

“The Government has initiated a review of the capital gains tax under the Income Tax Act with a view to formulating modalities for its effective enforcement.”

The minister said the steps would allow the wealthy to make “a token contribution toward our national development agenda.”

The Nairobi Securities Exchange (NSE) reacted by dropping points following investor fears that they would have to part with some of their gains made at the bourse.

There has been mixed reaction on the possible effect of this policy direction. The Faida Investment Bank chief executive, Mr Bob Karina, said he would wait until the Treasury gives a clear indication on its implementation of the levy.

READ: Capital gains tax seen as threat to markets

Real estate developers said that capital gains tax in the industry is not only inevitable but might help to cool the heating market that is making home affordability difficult.

Dampening effect

Kimiti Wanjaria, a director of real estate developers Serene Valley Properties, said that the tax should reduce speculation which is the main cause of rapid increase in land prices.

“It is inevitable. If they bring it (capital gains tax) on land it might tame escalation of prices,” Mr Wanjaria told the Business Daily.

Consultancy firm PwC is, however, explicit on the adverse impact the proposed tax may have on gambling.

“The government has announced plans to impose a 20 per cent withholding tax on gambling winnings. In other countries, such taxes have often had a dampening effect on wagering, and we expect that the same will occur in Kenya as well,” said the report titled Gambling Outlook for 2013-2017.

PwC estimated that the government collected Sh259 million from taxing gambling earnings in 2012. Taxes on gambling earnings are expected to hit $5 million in 2017.

Last year the government collected Sh779.4 billion against a target of Sh823.7 billion, representing a Sh44.2 billion shortfall.

Ratings agency Fitch has warned the government on the widening budget deficit, which it said threatened to derail growth in 2014 if not managed.