The Treasury is recruiting more property agents to help the Kenya Revenue (KRA) rein in landlords evading tax amid huge shortfalls in collections from rental taxes.
It said compliance among property owners was low despite the payment process being “simplified”, prompting a review of the approach.
The Treasury's latest analysis covering the year 2022 shows that collections from residential rental income taxes fell short of projections by Sh27 billion.
This is after the KRA “simplified” the compliance by requiring property owners generating an average of between Sh24,000 and Sh1.25 million every month to pay tax at the rate of 7.5 percent of the gross earnings.
The current rate took effect in January following changes in the Finance Act 2023 that lowered it from the previous 10 percent.
“The simplification was introduced to enhance compliance. Though it has increased the number of taxpayers, it has not achieved the envisaged compliance [in remitting rental income tax],” the Treasury wrote in the 2024 Budget Policy Statement.
“To address compliance challenges in rental income taxation, the government will enhance the registration of property agents, mapping of properties, and leveraging on technology. In this regard, and to ensure fairness and equity, the government will review taxation of residential rental income.”
Section 6A of the Income Tax Act says property owners with annual rental income of between Sh288,000 and Sh15 million are required to file a monthly tax return declaring the gross earnings from which tax payable is computed at 7.5 percent.
The property owners have the option of paying taxes at the standard rate of 30 percent of profit.
Landlords have, however, complained of unfairness that hinders compliance.
A property owner in Nairobi, who did not want to be identified, said paying tax on gross rental income will push most landlords out of business. An average of 30 percent of gross monthly collections from rent goes to servicing loans, he said.
“If the bank takes 30 percent of rent we collect, the KRA takes 7.5 percent of gross income, then there is realtor [agent] fees on top of repairs and maintenance, what is the landlord left with?” posed the landlord in Nairobi’s Eastlands.
“That's why we are finding it difficult to pay this tax. It would be fair if the share they are asking for is based on net income, not gross.”
The KRA has identified landlords, high net-worth individuals, small traders, and businesses operating online as sectors with high potential for growing revenue.
Tax revenues fell below targets by Sh178.54 billion in the half-year ended December 2023 after receiving Sh1.02 trillion from earnings by individuals and corporate entities, VAT, excise, and import duty streams. This was against a goal of nearly Sh1.2 trillion set by the Treasury.
The taxman has in recent years come under fire from business lobbies for over-burdening the formal sector with taxes, while a majority remains outside the tax bracket.
