Stockbrokers now take tax case to the Court of Appeal

Stockbrokers are set to move their fight against the capital gains tax (CGT) to the Court of Appeal following a High Court ruling allowing the taxman to implement the new levy.

The Kenya Association of Stockbrokers and Investment Bankers (Kasib) has challenged Justice Mumbi Ngugi’s Friday decision to throw out its petition seeking to shelve the tax, in the Appellate Court.

Justice Ngugi ruled that Parliament properly passed the law and that its implementation is a matter of policy that does not violate traders’ rights. She however ordered that the current state of affairs be maintained for 21 days to allow Kasib file its appeal papers.

“The matter is intended to be taken for an appeal for determination from a higher court. There is no indication that Kasib’s members are not established companies. If KRA’s position prevails in the Court of Appeal, they will be entitled to claim the tax,” said Kasib lawyer Kiragu Kimani.

Justice Ngugi declined to grant Mr Kimani’s application to stop the Kenya Revenue Authority from implementing the tax. She argued that despite demands by KRA officers to stockbrokers for remittance of the levy, no collection has been made.

The judge ruled in favour of the taxman after finding that the National Assembly had subjected the law to accepted levels of public participation by discussing it on the floor of the House.

She argued that the Members of Parliament are representatives of the public, hence the House debates can be considered to be legitimate public participation, which is mandatory before any bill is passed into law.

“I find that debate on CGT took place in accordance with the National Assembly standing orders and that it does not violate Kasib’s or anyone’s rights. I am unable to find a violation of Kasib’s or anyone’s rights. I order for maintenance of status quo for 21 days to allow Kasib time to file its appeal,” the judge said.

The market intermediaries had said that tasking them with calculation of the tax would be unfair as they are not equipped to carry out the exercise. Their argument has however been overtaken by time following the Treasury’s decision to shift the burden of remittance to investors.

Treasury secretary Henry Rotich announced last month that he and the taxman had resolved to pass the remittance burden to investors, and that the necessary legislation to make the shift official was currently being worked on.

READ: Treasury shifts the capital gains tax burden to investors

Despite the shift, stockbrokers still want the tax scrapped, as they fear it will ward off potential investors from the Nairobi Securities Exchange. Its proposed implementation, they claim, has led to a steady decline in trade, with investors mulling a move to rival bourses.

But Justice Ngugi sided with Attorney General Githu Muigai, who had been enjoined in the suit, as she held that charging the CGT is a matter of government policy and not constitutional rights.

The removal of such a case, she added, would require a referendum for Kenyans to decide whether they want the tax charged.

“The challenges and consequences of implementing the CGT is not within the mandate of this court. Those are matters of policy for the KRA and Parliament. For removal of such laws, the solution is a ballot and not this court, which neither approves nor condemns any legislative clause,” she ruled.

The High Court ruling opens the door for KRA to go after investors for the CGT, as Justice Ngugi declined an application by Kasib to suspend its implementation until the matter comes up before the Court of Appeal.

The capital markets intermediaries had in their petition attacked the CGT laws for being vague, as two rates had been cited – five per cent and seven per cent.

The judge declined the argument after KRA said it had furnished stockbrokers with a set of guidelines that specified a five per cent charge.

READ: Capital gains tax war stalls trading at Nairobi bourse

Justice Ngugi acknowledged the error in the legislation, but allowed the law to stand as the taxman’s indication of five per cent in the remittance guidelines automatically repeals the provisions on the seven per cent rate.

KRA in its court filings defended the CGT, arguing that it was introduced to seal a number of loopholes that allow people to use the securities exchange to evade tax.

The taxman insists that the amount taxed will only be on gains earned from January 1, this year when the law was implemented, and not since acquisition as claimed by Kasib.

The High Court said that the fact that the law on CGT was suspended and not repealed means Parliament had intended to re-introduce the levy in future.

Justice Ngugi said that after perusing several editions of the Hansard, it was evident that Parliament had in 2006 and 2013 mulled its re-introduction.

“It had not been removed from the statute books, meaning it could be brought back. I do hold that it was the intention of Parliament to re-introduce the CGT and set a rate of five per cent,” she said.