Capital gains tax to spoil party for investors in stocks, property

The capital gains tax (CGT) that is set to be implemented in just over a week is threatening to spoil the party for investors in the thriving stock and property markets.

While the CGT has been set at five per cent down from Kenya Revenue Authority’s (KRA) proposal of 10 per cent, uncertainty still hangs over its impact on profit margins.

In the property market, the underlying concern is that the sector has only seen considerable upswing in the past few years and the CGT could stifle it too early in its development.

KRA, though, says the tax was suspended in 1985 precisely to allow the development of the property market, but now reckons it has grown and should therefore not escape taxation.

However, Institute of Surveyors of Kenya chairman Paul Wambua recently said even professionals were uncertain about the tax, which does not bode well for investors.

“The reintroduction of CGT has caused confusion and anxiety among a cross-section of stakeholders. This serves to scare away potential investors in the sector and subsequently reverse the gains and prospects in the sector,” said Mr Wambua.

The chairman’s call for the development of guidelines on CGT are yet to bear fruit.

The fear is that property prices could rise, forcing landlords to pass costs onto tenants just like some did when KRA demanded they start paying income tax from rent.

READ: KRA lays ground for collection of capital gains tax

Investors in the stock market who fear the tax will reduce the frequency of trading in securities expressed their reservations.

They said they were willing to accept and implement the tax if regulators found a way of reducing costs of installing new systems or upgrading existing ones as well as hiring more staff to input data and perform tax calculations.

According to Standard Investment Bank (SAB), jitters on the application of the CGT have already begun to adversely affect the stock market.

“With most counters on a downward momentum, both the NSE 20 index and NASI closed in the red for the seventh consecutive session… investors fretted (over) the introduction of capital gains tax effective January 2015,” said SIB on December 18.

READ: NSE 20 Share Index below 5000 on capital gains tax fear

SIB added it did not believe that CGT would be implemented come January 1, 2015 since the same had not happened in the region. In a meeting with KRA on December 18, players in the stock market said the law should be suspended until they are ready to implement it.

The chief executive of the Kenya Association of Stockbrokers and Investment Banks (Kasib), Mr Willy Njoroge, said members needed more time to prepare adequately. Mr Njoroge said the State should assist them find ways of meeting implementation costs.

“This is a law that we cannot afford to implement as it is. At the outset we were opposed to this law, but we are prepared to discuss how we can offset the costs involved in its application,” said Mr Njoroge.

But KRA’s acting deputy commissioner for policy, James Ojee said the law could not be suspended unilaterally.

He said that the controversial issue of the base year on which the calculation of gains would be based could be resolved after further consultations between brokers and the KRA.