Why capital gains tax is proving a hard sell

The Kenya Revenue Authority (KRA) has in the recent past been under pressure to increase the pace of collecting taxes to help the government meet its ever rising budget obligations — expected to hit the Sh2.6 trillion mark in 2017/2018.

Indeed, desperate times call for desperate measures and the KRA has sought to institute additional administrative measures to enhance tax collection.

One such measure came in a recent public notice on the collection of Capital Gains Tax (CGT) from the real estate industry.

In January, the KRA embarked on implementation of Paragraph 11A of the Eighth Schedule of the Income Tax Act, which requires CGT to be paid prior to application to the Lands Office for the transfer of any property.

CGT was re-introduced through the Finance Act 2014 after a 30-year suspension. It came into force in 2015 although its implementation has not been a smooth sail.

It has faced a few hurdles, including opposition from brokers at the Nairobi Securities Exchange, and now the KRA has picked another fight with the players in the real estate sector, including legal practitioners.

Initially, CGT chargeable on real estate was to be assessed and paid not later than the 20th day of the month following that in which the transfer occurred.

However, this was recently amended and starting last month, the KRA has made it mandatory for the seller (transferor) to file and pay the CGT through iTax as a condition precedent to assessment and payment of Stamp Duty by the buyer (transferee) and further before an application for transfer can be made.

This recent directive from the KRA requires sellers liable to CGT to assess and pay the tax before the conveyancing transaction is complete.

Peculiar transactions

The KRA needs to be alive to the peculiar nature of real estate transactions and the multiple parties involved.

For instance, most property transactions that are liable to CGT are financed by banks or saccos and the sellers of such properties can only receive payment after the transfer has been finalised.

Asking for CGT before receipt of payment may require the sellers to seek alternative funding to facilitate the transactions, which makes the KRA’s requirement an impediment to property transactions.

This has occasioned unnecessary delay in the completion of transfer of property and has spurred a serious storm.

Legal practitioners through the Law Society of Kenya (LSK), went to court on 10th February 2017 seeking orders to suspend the implementation of Paragraph 11A of the Income Tax Act which provides for the collection of CGT before the transfer of property.

The advocates further argued that the provision was in breach of the provisions of Article 40(2) (a) of the Constitution as it sought to limit the enjoyment of the right to property.

With the matter is still in court, my opinion will be limited to the administration of the collection of CGT.

With the introduction of iTax, KRA has access to all details on the property transaction with the result that instances of tax evasion have significantly reduced such that the latest move only increases the transaction cost without contributing significantly to revenue collection.

It is also important for the KRA to look at transactions from a business person’s perspective to appreciate that many variables such as delays at the land registry and financing arrangements, are critical elements in the transaction and have an impact on the successful conclusion of the transaction.

Plucking the goose

French economist and Finance Minister, Jean Baptiste Colbert aptly captured the dilemma facing the KRA when he said that “the art of taxation consist in so plucking the goose as to obtain the largest amount of feathers with the smallest possible amount of hissing.”

Given the disquiet that the latest KRA move has caused within the real estate industry, the KRA needs to do more to ensure that unnecessary administrative measures do not increase the cost of doing business and in the process reverse the impressive gains the government has made in easing the burden of doing business.