KRA to miss capital gains tax target by Sh6.8 billion

The government is set to miss nearly all of the Sh7 billion it expected from charging capital gains tax (CGT) on stocks and property this financial year, official statistics show.

The taxman is expected to collect a paltry Sh200 million in CGT by the end of the financial year in June against the Sh7 billion target, according to the Kenya National Bureau of Statistics.

Controversy has dogged the tax since its return through last year’s budget statement, leaving the taxman unable to apply it in key sectors such as the stock market.

Disagreement between the Kenya Revenue Authority (KRA) and stockbrokers has, for instance, stalled the application of the tax on stock market transactions and uncertainty as to who should report the gains in the housing market has equally stalled its application in the booming real estate sector. 

The Treasury is, however, expecting the situation to improve in the next financial year when it expects capital gains tax revenue to hit the Sh10 billion mark.

Tax experts, however, see the forecast as overly optimistic, especially given the fact that a number of legal suits challenging CGT are before court and may be decided against the taxman.

Stockbrokers and investment banks top the list of those who have challenged CGT in court and are seeking its elimination from the law books altogether.

READ: Brokers in new legal battle against capital gains tax

Capital gains tax is currently chargeable at the rate of five per cent and is charged on gains made during sale of an asset -- meaning the difference between the purchase and sale prices.

“The tax has not picked up because people are only becoming aware of it now. A number of sectors, including financial services, have challenged CGT in court thereby delaying its implementation,” said Stephen Okoth, a manager with tax and advisory firm RSM Ashvir.

Mr Okoth said there was also conflict between CGT and other taxes such as compensation tax and urged KRA to clarify the issues for smooth implementation.

Compensation tax is, for instance, imposed on cash received from an insurance company as claims payment for loss of an asset such as rental property.

“Even in the coming financial year, we don’t expect much to be realised from this tax as long as the outstanding issues are not resolved,” said Mr Okoth.

The CGT is considered among the key measures that are critical to broadening the tax base to meet the ever-rising public expenditures demands. Public spending is expected to rise by a quarter to Sh2.2 trillion in the 2015-16 fiscal year.

Budget estimates released last week show that the Treasury expects a 30 per cent increase in CGT tax revenues to Sh13.08 billion in the 2016-17 fiscal year.

Keen observers of Kenya’s taxation landscape reckon that is not likely to materialise because preparations so far made for the payment of the tax are not adequate.

The Institute of Certified Public Accountants of Kenya (ICPAK), for example, has proposed dialogue between the taxman and those affected by the new tax to smoothen its application and avoid prevailing uncertainty that could result in a stock market slump.

“We are of the considered opinion that necessary consultations should be held with wider stakeholders in developing an effective and business-friendly implementation framework,” said ICPAK vice-chairman Fernandes Barasa recently.

Brokers and investment banks are opposed to KRA’s attempt to make them the withholding agents for the tax arguing that the burden should fall on the investor who knows the actual gain made in a transaction.

The intermediaries also maintain that collecting the tax exposes them to lawsuits from investors who might disagree with them on the calculated amounts while failure to charge the tax would put them at the risk of being charged in a criminal court.

The Treasury has in the meantime spared the brokers the pain of collecting and remitting the tax, saying difficulties in establishing the gains made in each transaction needs to be addressed.

The burden would be left to individual taxpayers, with the chances that some would decide to remit while others would decide not to.

The Treasury expects to collect even more money in 2017-18 fiscal year when the CGT revenues are expected to increase to Sh14.56 billion – a 12-per cent growth from the 2016-17 fiscal year.