Politics and policy
How the taxman plans to get his share of rental incomes
Posted Sunday, June 17 2012 at 16:10
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.
The levy is provided for in the Income Tax Act and all that is being done is to enforce it, Finance minister Njeru Githae said.
“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.