KRA eyes higher capital gains tax on land deals

The Kenya Revenue Authority (KRA) will push to raise the capital gains tax on land if lobbying to adjust buying cost for inflation (indexation) bears fruit, a commissioner said on Wednesday.

Indexation means adjusting the cost, mostly upward, reducing the gain tax liability for buyers who acquired land at what today sounds ridiculously low price.

James Ojee, deputy commissioner at the KRA policy unit, said the acreage of agricultural land exempted from taxation — today some of the most prime land around Nairobi — is also likely to be fall as the taxman seeks to widen the tax base.

The capital gains tax guidelines issued by KRA exempt any land sale where the proceeds are less than Sh30,000 (virtually non-existent today) as well as sale of less than 100 acres of rural agricultural land. The tax collector agrees these stipulations are not realistic.

Speaking on the sidelines of a consultative meeting with property industry players organised by the Kenya Property Developers Association, Mr Ojee said the changes would also align Kenya’s tax practice with those of East African Community countries that allow for adjustment for inflation on cost of land for tax purposes.

“If you look at the inflation over the last 30 years, the Sh30,000 is not realistic, so we would like to pick it up in the next budget cycle. If you bring in that component of indexation, however, in the computation then the rates will go up,” he said.

“In other jurisdictions where there is indexation the rate is 30 per cent, so you cannot bring it in here and have five per cent….it is a question of equity and fairness. The exemption on land below 100 acres outside of townships is also one of the areas we would like to address, to bring this down.”

Deloitte East Africa tax director Maurice Wangutusi said last week that since the net gain on land bought many years back carries a very big component of inflation, paper gains are being taxed.

READ: Deloitte wants land sales adjusted for inflation to avoid taxing paper gains

He said KRA could make use of tools that track changes in value of money when calculating the adjusted cost of land, such as the price and consumer indices produced by the Kenya National Bureau of Statistics.

“Calculation of the adjusted cost should also take into account the developments that have been made on the land,” said Mr Wangutusi.

Mr Ojee said KRA would consider the views of the public and industry stakeholders in determining a new exemption level for proceeds and acreage.

The government has been accused of bringing in the new tax without adequate consultation as per the law, but KRA has pointed out that it was a result of a private Member’s bill in Parliament.

The rise in the rate of capital gains tax has also been seen as a possibility by experts, especially with the need to harmonise the new tax with what is being charged across the EAC bloc.

“We would like an investor to look at it in light of whether they would be better off at five per cent without indexation or at a higher rate with indexation,” said Mr Ojee.