Editorials

EDITORIAL: Weigh potential gains, losses of tax to economy

ROTICH

Treasury secretary Henry Rotich. FILE PHOTO | NMG

If capital gains tax on trades at the stock market had not been scrapped after being re-introduced in January last year, the Treasury would right now be about Sh10 billion richer from just one recent transaction.

Instead, it is the British Treasury that booked a Sh13 billion windfall from the recent swap of Safaricom #ticker:SCOM shares between UK multinational Vodafone and its African subsidiary Vodacom. 

This is a figure that will have Treasury secretary Henry Rotich scratching his head. He will look back with a sense of loss at similar transactions that have happened in recent times.

Helios recently sold Equity Group shares in a Sh50 billion transaction. The transaction earned the private equity group a handsome return, which would have yielded sizeable capital gains tax for the Exchequer.

There are other mega transactions already under way or in the horizon.

Businessman Naushad Merali has announced the sale of a 14.9 per cent stake in tyre distributor Sameer Africa to a strategic investor over an undefined period.

Billionaire Peter Munga also intends to sell 452.5 million Britam shares by July next year.

It’s a delicate balancing act for the Treasury boss, who must avoid the temptation to kill the goose that lays the golden egg. Mr Rotich’s persuasion to re-introduce the capital gains tax must be tempered with the appreciation of policy considerations that were made when the levy was scrapped.

The main reason why the charge was removed was to avoid locking out investors from the nascent bourse.

The fear that capital gains tax would drive out local and foreign investors outweighed the pressing need for investors to contribute to the national kitty.

Unlike the Western markets which are deep and well developed, the NSE is still dependent on fickle foreign investors who weigh Nairobi against other frontier markets that do not charge a similar levy.

There was also a problem with implementation of the tax.

The law appeared to have been hastily crafted giving investors and stockbrokers nightmares in their attempt to comply with it.

Any future amendments to the law that intend to re-introduce the tax must carefully consider its potential gains and losses to the overall economy.