Investors disposing of properties will still be exposed to higher tax charges even with the reduction in proposed capital gains tax (CGT) after lawmakers rejected calls to factor inflationary changes on the buying prices.
The Finance and Planning Committee of the National Assembly has recommended that the proposed tax on disposal of property such as houses, land, and privately-held shares in the Finance Bill 2022 be reduced to 10 percent from 15 percent fronted by the Treasury.
This means the rate, applied on net proceeds from the sale of property, will double from January next year if the House endorses the committee’s recommendation rather than triple as had been proposed in the Bill.
The property sellers will, however, still be exposed to high tax charges after the legislators refused to allow the introduction of inflation adjustment —technically known as indexation — on the buying price of the property when calculating the CGT.
“The increase in CGT from five percent to 10 percent was a huge leap,” the committee, chaired by Gladys Wanga (Homa Bay), wrote in its report on Tuesday. “Introduction of indexation requires wider stakeholders’ consultations.”
Indexation ensures that the effect of inflation on the buying price is eliminated when calculating CGT upon disposal of the property.
Tax experts, business associations and professional bodies had argued 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.
The debate for inflation adjustment on CGT was rife when the country re-enforced the tax in January 2015 after a 30-year suspension, but was shot down on grounds that it will “complicate the process” of calculating the rate.
Ultimately, the country settled on a modest five percent rate on net proceeds from the sale of property which was seen as simple and low enough to take care of inflationary changes over the years.
“One would have hoped that with the proposed increase in the CGT rate, the Government would also have introduced the concept of indexation to ensure that the effects of inflation are factored in determining the taxable capital gains,” consultancy and audit at Deloitte wrote in a report on the Finance Bill 2022.