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Landowners win as KRA’s advance capital gains tax stopped

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Justice John Mativo of the High Court. FILE PHOTO | NMG

The Kenya Revenue Authority (KRA) has been barred from demanding capital gains tax payments from investors before completion of asset sales following a court ruling that quashed new regulations on the levy.

Justice John Mativo Tuesday ruled that paragraph 11A of the Eighth Schedule of the Income Tax Act infringes on the rights of both buyers and sellers by demanding that capital gains tax be paid before completion of asset sales.

The judge argued that the regulation could hinder transactions as some buyers and sellers may not have the financial muscle to make tax payments before completing asset sales.

This, the judge held, contradicts the public’s right to property hence making it in contrast with the Constitution.

The Law Society of Kenya (LSK) last month sued the KRA arguing that the new regulations had stalled several deals worth millions of shillings.

The advocates’ lobby added that it is difficult to ascertain the amount of capital gains tax due before completion of a sale transaction.

The regulations required investors to remit capital gains tax upon presentation of the asset at the centre of a sale deal, rather than after completion of the transfer process.

“It is common knowledge that where the sale agreement provides that payment shall be made upon transfer, then a vendor who is not financially able will not be able to sell his property and a willing buyer may also not be able to proceed with the transaction. To me, this infringes on both the vendors’ and purchasers’ right to property hence it is unconstitutional.”

“A declaration be and is hereby issued declaring that paragraph 11A of the eighth schedule of the Income Tax Act violates the provisions of the Constitution of Kenya in that it unfairly imposes a tax burden on the public to the extent that it purports to impose a tax burden on or before presenting the transfer instrument for registration instead of upon registration to the transferee,” justice Mativo ruled.

The KRA had argued that the disputed regulation was only added to make clear when capital gains tax is due, and that it neither contradicted other sections of the Income Tax Act nor the Constitution.

Attorney-General Githu Muigai argued that the LSK had not specified how exactly the disputed law infringed on the public’s rights. He added that in the present dispute, public interest tilts in the taxman’s favour as to when capital gains tax is due.

But justice Mativo held that paragraph 11A created ambiguity and contradiction when read together with other sections of the Income Tax Act which define how and when capital gains tax is paid.

The LSK argued that it attempted to engage the KRA in dialogue to resolve the disputed clause, but that the taxman stayed put forcing it to move to court.

The KRA began implementing the disputed clauses on January 30, and the LSK insisted that it risks affecting Kenya’s economy by frustrating land deals, which have now stalled.

The taxman insisted that the new regulations were in line with both the Income Tax Act and international accounting standards, which provide that levies should be paid when revenue is earned, and not when received.

“The tax will be payable prior to transfer. The effect is that a citizen may be called to pay tax before it is due, thereby creating an unfair tax burden to the citizens,” justice Mativo added.