Treasury plan to tax rent income runs into hurdles

A consumer rights watchdog on Monday said it will ask courts to block the Kenya Revenue Authority from charging taxes on rents for residential houses as proposed in the Budget speech.

The Consumer Federation of Kenya said the tax would squeeze household incomes through higher rents.

The Central Organisation of Trade Unions and the Institution of Surveyors of Kenya also objected to the tax.

“We will seek legal arbitration in the judicial system if KRA moves ahead to collect taxes from landlords,” said Cofek chief executive Stephen Mutoro.

Double taxation

Francis Atwoli, secretary-general of the Central Organisation of Trade Unions (COTU) said enforcing the directive would result in double taxation on property owners who are already paying rates to local authorities.
“Landlords are already paying land rates,” said Mr Atwoli, adding that tenants would shoulder the tax through higher rents.

Mr Mutoro said Cofek would seek a meeting with Finance minister Njeru Githae to propose that the tax be suspended until the ongoing mapping of rental properties is completed.

Cofek said the mapping would bring the Treasury to terms with the residential rental market whose ownership is so fragmented that tenants pay varied rents for similar units, even within the same block.

Cofek said MPs should vote against the new tax because it would hurt low-income earners the most because they do not have tenancy contracts that could protect them against rent increases.

“About 90 per cent of households earn less than Sh30,000 a month, and these are the people who will be hardest hit by these new measures,” said Mr Mutoro.

The law on property taxes came into effect in 2007 but its enforcement has been hampered by logistical challenges.
Property experts said the tax would discourage new investments in the real estate sub-sector.

“If landlords are not able to offset the tax liability through raising rents, returns from the sector will decline. The move could be a disincentive to potential investors,” said Mwenda Makathimo, the managing director at Vidmerck Ltd, a real estate consultancy firm.

The Institution of Surveyors of Kenya (ISK) said it was opposed to the new tax because it would discourage investments in real estate at a time when there is a deep shortage in housing.

“We have seen panic in the real estate because the minister’s move to enforce the law on taxing landlords has been interpreted to mean that rents should rise,” said ISK chairman Collins Kowuor. He said Mr Githae should come out more clearly on the issue.

ISK said incentives in the housing sector have not been good enough to attract adequate investments. It takes between eight to 10 years for a residential property to make a profit and up to 12 years for a commercial property to break even.

“We have high demand for housing but the minister did not give enough incentives. We need more incentives to meet the demand,” said Mr Kowuor.

Although many of the owners of properties being managed by professionals are already paying tax, he estimated that tax was not being paid for 60 per cent of buildings in the city.

The tax evaders are mainly those who collect the rent themselves or had outsourced the work to unregistered property agents.

“Between 70 and 80 per cent of urban dwellers are tenants and so this move could have serious repercussions.

We should consider that there is a housing deficit and landlords could take advantage to raise rent,” said Mr Kowuor.

However, legal experts have argued that there is no likelihood that a policy on taxation, which has already been passed into law can be challenged in court.

“Rental income is not exempt from taxation,” said a Nairobi-based commercial lawyer who requested anonymity because of his professional engagements in the sector.

KRA estimates that landlords constitute the single largest group of businesspeople whose income is untaxed, and plans to raise Sh90 billion in the current financial year through the proposed measures.

“Rental income will be taxed at the income rate and will require landlords to simply pay tax on whatever income they earn from rental property,” Mr Githae said last week.

The tax, he said, would be paid by all landlords earning more than Sh10,000 per month from rent and graduated according to the Pay As You Earn scale.

ISK, however, said the tax bands for rent income should be broadened and tax breaks introduced to cushion investors from the long pay-back periods.