Parliament returns capital gains tax after 36 years

Parliament Wednesday amended the law to bring back the capital gains tax 36 years after it was abolished.

The new law, which was passed through an amendment to the Finance Bill 2014, sets companies and individuals on the path to paying taxes on the proceeds of property sold beginning January 1, 2015.

Kenya removed capital gains tax from its laws in 1978 hoping to use it to attract investment in its stock market, mining licences and real estate among other sectors.

Members of Parliament Wednesday brought back the tax by amending the Eighth Schedule of the Income Tax Act.

“Subject to this Schedule, income in respect of which tax is chargeable under Section 3(2)(f) is the whole of a gain which accrues to a company or an individual on or after January 1, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before January 1, 2015,” says Clause 22 of the newly enacted Finance Bill. 

The tax will be charged “at the rate of five per cent and shall not be subject to further taxation”. Tax experts estimate that the KRA could rake in additional Sh9 billion annually from this tax.

The amendment comes after several past attempts to bring back the tax died on the floor of the House – rejected by the MPs.

The new law provides that a firm acquiring more than 50 per cent stake in mineral blocks will pay a premium tax, technically called net gain tax, on the value of the transaction after deducting attendant costs.

READ: Treasury targets capital gains tax in Finance Bill

If President Uhuru Kenyatta signs the Bill into law, deals involving stakes in oil and other mineral blocks will for the first time be subjected to capital gains tax as the Treasury looks for ways of collecting more revenue from natural resources.

Wednesday’s amendments to the Finance Bill will also see withholding tax on dividends from mining operations rise from 10 per cent to 20 per cent.

The proposed law says that where the net gain is less than 50 per cent and the stake less than 50 per cent, the income tax payable will be determined by a formula that takes into account the stake sold and the value of the block.

Passage of the Bill means that the government could collect a lot more revenue from property sales in the booming real estate sector.

MPs rejection of the capital gains tax has in the past been seen to be backed by powerful business interests with huge presence in the targeted sectors of the economy.

Suba MP John Mbadi supported the amendment, saying the Jubilee government had lost billions of shillings in revenue following last year’s rejection by fellow MPs of his attempt to reintroduce the tax.

“I am not happy with the proposed rate but I am delighted that the Jubilee government has finally seen the sense in having this tax,” he said.

MPs, however, rejected attempts by the National Assembly’s Finance Committee to introduce the tax on proceeds of land or property compulsorily acquired by the government.

The committee had proposed that compensation for property acquired by government for infrastructure development to be taxed but Samuel Gichigi (Kipipiri) and Nicholas Gumbo (Rarieda) said it would be unfair to tax individuals whose land is involuntarily taken away for infrastructure development.

“Taxing compensation money shows the government is heartless and desperate,” Mr Gumbo said.

Mt Elgon MP John Serut argued that it would be wrong to tax such transactions because the compensation is never commensurate with the value of land compulsorily acquired.

Ainamoi MP Benjamin Lang’at who chairs the committee had argued that the amendment targeted compensation in infrastructure development.

“The MPs should be alive to the fact that people are taking advantage of government acquisition to inflate the price of land up to threefold in cities such as Nairobi,” he said, adding that the government buys such properties at market price making it necessary to tax the gains.

Parliament also sought to amend the value added tax (VAT) Act to exempt aircraft and aircraft parts to make the industry competitive.

“We have had huge refund claims for Kenya Airways. We seek to exempt the aeroplanes of unladen weight of between 2,000 kg and those exceeding 15,000 kg to make the airlines competitive.

“Kenya has been a hub for maintenance of aircraft and after taxes were introduced, we lost the competitiveness to other regional,” Mr Lang’at said.

Agricultural tractors and inputs or raw materials supplied to solar equipment manufacturers or deep cycle-sealed batteries which exclusively use or store solar power as approved by the Treasury were also exempted from taxation.