Economy

Firms seek capital gains tax reprieve in law as rate triples

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Kenya Association of Manufacturers (KAM) chairman Mucai Kunyiha. FILE PHOTO | NMG

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Summary

  • The calls come on the back of proposed changes to the Income Tax Act seeking to raise capital gains tax (CGT) from the current five percent to 15 percent from January next year.
  • Indexation involves adjusting the base (original) buying price of a taxable property upwards for tax purposes to mitigate the inflationary distortion.
  • Tax experts argue some of the capital gains are attributable to inflation as the value of money decreases over time and can be removed by adjusting the buying price accordingly.

Manufacturing firms and tax experts have renewed calls on lawmakers to amend the law to factor inflation when calculating capital gains tax (CGT) accruing on the disposal of house, land and privately-held shares.

The calls come on the back of proposed changes to the Income Tax Act seeking to raise capital gains tax (CGT) from the current five percent to 15 percent from January next year, increasing the obligation for those looking to sell a house or land three-fold.

“The proposal is punitive and will likely affect mergers and acquisitions and investments in the construction industry,” the Kenya Association of Manufacturers, which is opposed to the increment, wrote in a memorandum to the National Assembly.

“The government should consider introducing an inflation adjustment (indexation) to arrive at the equitable acquisition value of the property instead of increasing the CGT rate.”

Indexation involves adjusting the base (original) buying price of a taxable property upwards for tax purposes to mitigate the inflationary distortion.

Tax experts argue some of the capital gains are attributable to inflation as the value of money decreases over time and can be removed by adjusting the buying price accordingly.

“Now that we have had CGT for a while, it is perhaps the time for indexation to commence because we have gathered enough data for the last seven years. That’s the way to go,” Philip Muema, a partner at Andersen Kenya, a tax and business advisory firm, said on phone.

“But tripling that rate from five to 15 percent is killing the real estate sector. That will make investment in our country more unpredictable, we will mess up our ease of doing business index and slow the growth of the economy.”

The debate for inflation adjustment on CGT was rife when the country reintroduced the tax in 2014 after a 30-year suspension but was shot down on the ground that it will “complicate the process” of calculating the rate.

Ultimately, Kenya settled on a modest five percent rate on net proceeds from the sale of property like land and buildings which was seen as simple and factoring in inflationary changes over the years.

By proposing to raise the tax and avoiding indexation, Treasury secretary Ukur Yatani has handed the Kenya Revenue Authority a boost in revenue collection but has left property developers at a disadvantage.

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