Real estate dealers have made huge gains while paying little by way of tax. FILE
What you need to know:
The capital gains tax is set to be re-introduced to take advantage of the rising prices at the stock markets as well as transactions in real estate and unquoted shares.
The proposed capital gains tax could stifle growth of the real estate sector and the stock market if it is too high, experts have warned.
The capital gains tax was suspended in 1985 but is set to be re-introduced to take advantage of the rising prices at the stock markets as well as transactions in real estate and unquoted shares.
“The Government has initiated a review of the capital gains tax under the Income Tax Act with a view to formulating modalities for its effective enforcement. This will allow wealthier members of our society to also make a token contribution toward our national development agenda,” said National Treasury cabinet secretary Henry Rotich in his Thursday budget speech.
The call for re-introduction of the capital gains has increased with creation of new stock exchange billionaires. In the past seven years, company owners have exited or reduced their shareholding by floating shares on the exchange, making billions in the process.
Real estate dealers have also made huge gains, while paying little by way of tax. Tax experts at PwC however warned on Friday that a rate above 10 per cent would be counter-productive to the property and stock markets.
Their counterparts at accounting and auditing firm PKF had in a pre-budget analysis said they estimated that about Sh100 billion worth of capital growth in property takes place each year and could generate tax revenue.
“The capital gain taxes will introduce equality in taxation but should be well thought out to avoid stifling real estate and home ownership,” said Michael Mburugu, tax director at PKF.
The NSE 20-share index has risen by nearly five times in the past decade while bonds turnover has grown by more than 11 times since 2006. In December 2002, the NSE 20-share index stood at 1,363 points, but in the past few weeks it has ranged between 4,800 and 5,000 points.
Bonds turnover was at Sh48 billion in 2006 but ended 2012 at Sh567 billion. Its first major jump was in 2010 when it rose by more than four times to Sh479 billion from Sh111 billion in the previous year.
This was partly a result of the introduction of infrastructure bonds in 2009 that came with several incentives such as removal of withholding tax on interest earned.
In the property market, most surveys have shown that prices of buildings and homes in Nairobi and Mombasa have risen by more than three times since 2007.
Capital gains have also been an issue in oil and mineral exploration. Ministry of Energy officials have been pushing for the tax since early last year as some companies made billions by transferring prospecting rights to other multinationals shortly after UK-based Tullow discovered oil in parts of Turkana.
