Capital Markets

Treasury shifts the capital gains tax burden to investors


An investor on the NSE trading floor during the opening of the Exchange Building in Nairobi last year. PHOTO | FILE

Treasury secretary Henry Rotich has shifted the burden of paying and accounting for capital gains tax to investors at the Nairobi Securities Exchange (NSE).

This ends the fight with stockbrokers that nearly paralysed trading at East Africa’s largest bourse.

Mr Rotich on Wednesday told the Business Daily that the Treasury, the Kenya Revenue Authority (KRA) and the brokers had agreed that the task of accounting for the tax be left to investors — not the market intermediaries.

“We are working on legislation that will require individuals filling their tax returns to account for CGT [capital gains tax],” Mr Rotich said, adding that any other challenges that the brokers may have with the tax would be resolved through next year’s Finance Bill.

Martin Kisuu, a tax expert with Taxwise Consulting Limited, welcomed the decision to have investors account for the tax, saying that is the practice in most jurisdictions.

“That is the way it should be because it is being collected under the Income Tax Act, which requires individuals to do self-assessment and file,” Mr Kisuu said, adding that it should not be difficult to enforce because the parties will be dealing with a formal business that has ready information.

“You can actually change the law to require the brokers to submit the information so the fear of non-compliance should not arise.”

Stockbrokers said their concern has been with both the introduction of the tax and its administration, which had put the burden of accounting for the tax on them.

“This is not an advisable tax to introduce in the capital markets. It is a cumbersome tax and investors, especially foreigners who are not obliged to invest here, want an easy entry and easy exit,” said an investment banker, who did not want to be named because of the government’s strong arm tactics in the ongoing war of words with brokers.

READ: Capital gains tax row hits foreign inflows at NSE

Brokers further said the tax was not charged in other East African countries, establishing an unfair business landscape that gives Uganda, Tanzania and Rwanda undue advantage over their Kenyan counterparts.

Shifting the responsibility of accounting for the capital gains tax to investors through an amendment of the relevant law means the taxman will have to wait until the next financial year beginning July to bring the new tax measure into force.

It also means brokers are for the time being not required to levy the tax while the investors cannot take up the job because it would be unlawful to do so.

The stockbrokers said they would consult among themselves once the law is amended even as they continue to push for a cancellation of the tax.

Supporters of the tax said investors in the capital markets are usually the rich and allowing them to trade without capital gains tax was deepening inequality.

Disagreement between the brokers and the government arose from regulations that the KRA released recently stating “the responsibility to collect and account for tax will be on the stockbrokers”.

The brokers took offence with the term “account” arguing that the law required them to collect and remit.

Capital gains tax is to be paid at the rate of five per cent of the difference between the price at which the shares were acquired and the selling price less the transaction costs.

The tax was supposed to be collected at the beginning of the year but has been hampered by the push and pull between the two parties.
It is to be submitted by the 20th day of every month after the trade.

The fear of piling tax liability forced the brokers to threaten a trading boycott at the bourse beginning Friday last week.

A late night meeting with the Capital Markets Authority, however, saw them step back on promise that a decision would be reached between the KRA and the Treasury.

READ: Stockbrokers shelve threat to stop NSE trade

The stockbrokers through the Kenya Association of Stockbrokers and Investment Banks (Kasib) had argued that their information systems were not robust enough to account for the tax.

To calculate the tax the brokers were to rely on the Central Depository and Settlement Corporation’s (CDSC) system to determine the acquisition prices of shares bought after 2005.

For shares bought between 2005 and 1998 they were to use the highest price recorded by specific stocks that year as found in the NSE records. Shares bought prior to 1998 were to be assumed to have been acquired at the highest price recorded in 1998.

Kasib pointed out some investors move shares between brokers making it difficult to track the history of their trading. By changing the law to lay the burden on the investor Kenya will be following the path of all other jurisdictions that apply the capital gains tax.

Capital gains tax also applies to real estate transactions, shares of private companies and government securities.