How the taxman plans to get his share of rental incomes
Minister for Finance Njeru Githae displays the budget briefcase outside Treasury on June 14, 2012. The most serious penalty for a tax defaulter is, according to the Income Tax Act, an interest of two per cent per month on the unpaid tax, adding up to a total of 24 per cent per year until the payment is delivered. Photo/Jayne Ngari
Kenyan landlords earning more than Sh10,000 from rental houses will be charged income tax at the prevailing Pay As You Earn (PAYE) rates from this month, a move that could spark a wave of rent increments countrywide.
“We decided to move after it came to our attention that over 40 per cent of all rental buildings are not registered and are therefore not paying taxes,” Mr Githae said. “We are liaising with utility companies and local authorities to identify the accounts they use to pay their power and water bills.”
The Institute of Surveyors of Kenya said the move could be abused by unscrupulous landlords who may effect arbitrary rent increases, leaving tenants with a heavy burden that is a recipe for high level inflation.
“This is a laudable fiscal measure, but the ISK is of the opinion that the directive could give unscrupulous landlords a reason to arbitrarily increase rents, under the guise of passing the burden to consumers (tenants),” said ISK chairman Collins Kowuor.
Construction sector professionals are also worried that the tax could reduce the volume of investments in housing at a time when Kenya is grappling with a huge housing deficit.
KRA has embarked on the task with a mapping out of buildings in Nairobi and all major towns to identify properties, and their locations in readiness for enforcement, beginning next month.
The information is to be fed into the Global Positioning Radio System (GPRS) to help cut the cost of implementation to KRA.
Those occupying their own houses are, however, spared the tax because they do not earn rental income from the properties they occupy. “If we get one account for either water or power bill, then we know it is a residential building,” Mr Githae said.
“In the middle or lower ends of the market where we have flats, for instance, if we get one person with 30 to 40 accounts, we definitely know the building is rental,” he said.
The taxman will allow landlords to deduct expenses such as mortgages and land rates from their earnings before computing the taxes due.
The Treasury has empowered the taxman to assess and impose the applicable taxes, meaning that those who do not voluntarily own up will receive demand letters for tax, complete with penalties and interest due.
The most serious penalty for a tax defaulter is, according to the Income Tax Act, an interest of two per cent per month on the unpaid tax, adding up to a total of 24 per cent per year until the payment is delivered.
The measure by the minister took effect beginning last Friday.
KRA estimates that landlords constitute the single largest group of businesspeople whose incomes remain untaxed, denying the country billions of shillings in uncollected revenues.
“Rental income will be taxed at the income rate and will require landlords to simply pay tax on whatever income they earn from rental property,” Mr Githae said. Targeting landlords is expected to help the taxman grow income tax revenue by 22 per cent to Sh383 billion in line with the growth in government budget to Sh1.45 trillion.
Speaking to the Business Daily after a post-budget hearing last Friday, PricewaterhouseCoopers director of tax services Steve Okello said rental income cannot be considered under the turnover tax even if the amounts involved are within its threshold.
Turnover tax,which became effective from 2007, is charged on businesses with sales turnovers of between Sh500,000 and five million shillings unless they opt to be under other forms of domestic taxes, such as corporate tax.
Paid at the rate of three per cent of sales, it would amount to much lower tax for landlords if applicable.
The pain from interest charged on unpaid taxes comes from the power of compounded interest.
A landlord, whose taxes amount to Sh100,000 per month, and has not paid rental income tax for year 2010, about a year since the payment was due, would for instance pay at least Sh124,000 excluding other penalties if they were to pay it today.
Because the tax has been due all along under the Income Tax Act, owners of buildings who are not paying taxes may be required to pay penalties starting from the date their buildings were given a certificate of occupation.
“There is nothing that is new in this measure. The minister has only affirmed what should have been the case all along given the country’s rising need,” said Mr Okello.
KRA intends to use the GPRS to map out all buildings in order to identify those for which rental income tax is not being paid. This will involve use of data from the Ministry of Lands, utility firms and the local authorities.
Landlords are, however, expected to react to the move by raising rents to cover for the tax.
KRA had earlier warned landlords that they risked having to pay tax arrears on rental income as well as penalties and interest if they did not present themselves to the revenue authority and cleared their tax obligations.
After roping in the landlords, KRA plans to extend the tax net to informal sector businesses with huge turnovers that do not pay taxes.
The intention is to identify all those who are not paying taxes but are earning much more than their counterparts in the formal sector. [email protected]
