Pressure mounts on Treasury to bring back capital gains tax

The recent sale of multi-billion shilling Kenyan businesses without any revenues accruing to the government has sparked pressure for the reintroduction of capital gains tax – 25 years after it was suspended.

The tax – usually charged on profits from the sale of assets held for at least 12 months – was suspended in 1985 as part of measures to make Kenya more attractive to foreign direct investment, but tax experts now argue that it should be reintroduced to put the country in line with global trends.

Kenya also eliminated foreign exchange controls and allowed profit repatriation as part of the measures to make the economy more attractive to foreign capital but the conclusion of multi-billion shilling deals that left the government without a penny in revenues has raised eyebrows among ordinary Kenyans and raised a furore in high public offices.

“We are losing a lot of revenue by simply not taxing wealth made from capital gains leaving the working class to carry the country’s financial burden,” said Martin Kisuu, a tax expert and partner at audit firm PFK.

Mr Kisuu reckons that the suspension of capital gains tax to encourage investment has outlived its purpose and needs to be reintroduced to enhance equity in tax payment.

“We need to tax wealth such as capital gain to broaden the revenue base and nurture an equitable tax regime,” said Mr Kisuu.

To show how critical capital gains tax can be to the national revenue kitty, experts give the example of Uganda, which is expected to make a windfall of approximately Sh32 billion (Kenya shillings) from the sale of one of the oil blocks owned by Heritage Oils to Tullow Oil, a British exploration firm.

In contrast, Kenya has earned nothing from the multi-billion transactions involving multi-national companies that have taken place within its borders in recent months.

The transactions span the telecommunication industry, property, land, petroleum and the financial sectors.

Critics of the capital gain tax suspension point to the change of ownership at the country’s second largest mobile phone service provider from KenCell to Celtel, Zain and ultimately Bharti Airtel as an example of deals that had the potential of earning the exchequer billions of shillings in revenue but from which the government got nothing.

KenCell, which was Kenya’s first mobile phone firm, was 60 per cent owned by Vivendi — a French conglomerate and 40 per cent by Sameer Group owned by local business magnate Naushad Merali.

Celtel International, the Europe based phone firm owned by Sudan-born billionaire Mo Ibrahim, paid $250 million to acquire Vivendi’s stake in the firm in 2005.

Tax experts say that deal alone was worth $75 million had it been subjected to a capital gain tax of 30 per cent.

Celtel only run the business for two years before selling its stake to Mobile Telecommunication Company (MTC) of Kuwait at a price of $2.8 billion. Mr Merali also took advantage of the window and sold half of his 40 per cent stake reaping $50 million.