KRA mulls capital gains tax for land below 100 acres

The taxman is considering lowering the threshold of a new property tax to below 100 acres for dealers of the highly priced peri-urban land.

Land sellers outside Nairobi, Mombasa and Kisumu official boundaries are not subject to the capital gains tax (CGT) for up to 99 acres as their land is considered rural agricultural land under Eighth Schedule of the Income Tax Act.

This is despite rapid changes in recent years where value of land on the outskirts has risen due to demand for housing as well as factories.

Land smaller than 100 acres in cities was subjected to CGT when it was applicable before 1978.

Kenya Revenue Authority (KRA) said the proposal to reduce the ratable acreage has been made by various stakeholders demanding equity in CGT since the authority could be losing a lot of revenue if it continued to exempt the land.

“We have proposals brought before us saying that exempting those who own a 100 acres outside the major urban areas means that KRA is forgoing a lot of revenue. We are considering them for future change in legislation,” said James Ojee, KRA acting deputy commissioner policy unit.

Outside Nairobi, for example, land is being sold for more than Sh40 million per acre especially in the areas previously occupied by coffee plantations.

KRA is expecting to raise about Sh7 billion through CGT in the period between next month and June. The tax will be applied from January 1, 2015.

READ: Kenya's president approves 5pc capital gains tax

The Institute of Surveyors of Kenya, however, called for the regulations relating to the CGT to be released before then. “The issue we have with the law is that of the time of releasing the regulations. We need them to be released early before the tax is applicable,” said Moses Kiambuthi, the ISK’s chief executive.

Mr Ojee said that some stakeholders were also pressing for the CGT be linked to the level of inflation— a process called indexation—because it would provide for the costs related to loss of value over time.

However, KRA commissioner general John Njiraini said the driving force for the current law on capital gains tax was to make it simple even if that meant not using conceptually better methods.

Mr Njiraini said that the best way would be to charge CGT at 30 per cent — just like income tax— and then index it to inflation.

“What we are looking for is to make the tax system simple to implement and reduce chances of disputes. Instead of the high figure of 30 per cent for purposes of CGT, the level was put at five per cent, but without indexation,” said Mr Njiraini.

The Commissioner-General said tax mobilisation would only be enhanced if fiscal policy targeted the growth sectors of the economy.

“The important point to note is that Kenya cannot hope to enhance tax mobilisation and improve tax productivity as long as fiscal policy continues to shield high growth sectors from taxation,” said Mr Njiraini.

He said taxation policy should follow the path that wealth flows such as property and capital sectors of the economy, the most lucrative in the last decade.

“Quite ironically, we continued to shield those who were making the largest amount of wealth from these two sectors while in the same breath continuing to tax incomes made from meagre sources, including from formal employment,” said Mr Njiraini.