Capital Markets

Treasury’s capital gains tax to raise house prices

Kenyans will soon know if profits made from selling shares, bonds, land, and houses will be liable to capital gains tax, finance minister Njeru Githae said on Tuesday.

The Treasury is carrying out a study on how and whether or not it should re-introduce the capital gains tax whose recommendations could be implemented in the coming financial year.

The additional tax is one attempt to net more revenue that the Government needs to meet the demands of a rising wage bill and to continue the massive investments in infrastructure.

“There was a proposal in Parliament (to introduce capital gains tax) which I successfully opposed to enable me come up with something that is acceptable to Kenyans,” said Mr Githae on Tuesday after presiding over the NIC rights issue bell ringing ceremony.

Parliament had proposed a re-introduction of the capital gains tax on all investments gains but the Treasury limited the levy to transactions touching on oil and mineral exploration and mining companies.

The mineral exploration companies have recently made billions from trading their government issued licences.

Mr Githae said they had noticed a trend where mineral companies are benefiting by selling shares after a major discovery.

On Monday Canadian firm Africa Oil announced that it had sold a 50 per cent interest in oil exploration Block 9 and a 15 per cent interest in Block 12A to Marathon Oil for $32 million (Sh2.7 billion).

The study, said the finance minister, would answer if the initial objective of scrapping the capital gains tax has been achieved to warrant a re-introduction.

The capital gains tax was abolished in 1985 to encourage more Kenyans to widen their investment avenues through active participation in the stock and property markets.

In addition, officials are looking at how the capital gains tax, if implemented, can separate investors from speculators.

“For example if it is a house, the first one is exempted but if you sell the second one then you pay capital gains tax,” said Mr Githae.

Other ways the capital gains tax can be implemented is by slapping it on shares sold within the first five years (short-term) of buying the stocks.

The reasoning is that short-term sellers are speculating and not making genuine long-term investments, which the capital markets encourage.

Local players, both in the stock and property markets, however said they hoped that the Finance ministry would defer the decision to introduce the capital gains tax.

Faida Investment Bank chief executive Bob Karina said the aims of dropping the capital tax had not been achieved and that a re-introduction would only delay their attainment.

He said many Kenyan investors do not fully understand how the capital markets work, preventing more people from entering the market.

“This will create fear in the market and it is not the right thing to do at the moment,” said Mr Karina. As at the end of 2011 there were 1.94 million Central Depository and Settlement accounts, less than five per cent of the population.

Property Reality chief executive Brian Gachari said a capital gains tax on property was ill-timed as it would come when a majority of Kenyans are struggling to own a house.

“Property is still a huge a problem in terms of accessibility and affordability for the majority of Kenyans and what the government should be doing is creating tax incentives,” said Mr Gachari.
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