Taxes collected from financial deals arising from transfer of real estate and shares in privately-held firms posted a double-digit fall in the third quarter of the current financial year despite the rate being tripled, official data shows.
Tax receipts from transactions on real estate and private shares amounted to Sh3.28 billion in the January to March 2023 period compared with Sh3.76 billion in the same period last year, according to provisional revenue statistics by the National Treasury.
The 12.92 percent drop came in the first three months after the Kenya Revenue Authority raised the capital gains tax (CGT) rate three-fold to 15 percent. The fall may be a pointer to reduced property deals in the review period.
The data, however, shows a 64.27 percent year-on-year jump in the collections to Sh7.27 billion in the quarter preceding the increased CGT.
That helped boost CGT receipts for nine months through March to Sh14.26 billion, a 13.78 percent jump year-on-year.
Firms and households disposing of land, buildings and unquoted securities such as shares in privately-held companies are charged a five percent CGT tax on net proceedings from the transactions.
Buyers, on the other hand, are charged a stamp duty at the rate of four percent of the value of property in major towns and two percent in rural areas, while the rate for unquoted shares is one percent.
Defaulters of the CGT are fined a 20 percent penalty of the tax due.
The surge in the CGT rate was enforced in January 2023 after former President Uhuru Kenyatta signed the Finance Act 2022 into law last year despite pleas from stakeholders.
“Tripling that [CGT] 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,” Philip Muema, a partner at Andersen Kenya, a tax and business advisory firm, had warned prior to the Bill being passed by lawmakers last June.
The real estate sector has endured a sustained downturn in recent years with developers struggling to service loans on property, resulting in bankers hiring auctioneers to forcibly sell houses to recover accrued debts.
Tax experts, business associations and professional bodies had also unsuccessfully called for the introduction of inflation adjustment on the buying price of the property when calculating the CGT.
Consultancy and audit firm, Deloitte, had, for instance, argued that with increased CGT, the Treasury would have introduced “the concept of indexation to ensure that the effects of inflation are factored in determining the taxable capital gains”.
“The significant increase in CGT rate could also slow down investment and transactions in certain sectors such as real estate,” analysts at Deloitte wrote in an analysis last year.
The debate for inflation adjustment on CGT was rife when the country re-enforced the CGT tax in January 2015 after a 30-year suspension, but was shot down on the ground that it will “complicate the process” of calculating the rate.
Ultimately, the country settled on a modest five percent rate on net proceeds from sale of property like land and buildings which was seen as simple and low enough to take care of inflationary changes over the years.