The Finance Act of 2022 (Finance Act) has amended the Income Tax Act (ITA), by increasing the rate of capital gains tax (CGT) from 5 percent to 15 percent.
The Finance Act provides that the increase will take effect from 1 January 2023. In the case of a firm certified by the Nairobi International Financial Centre Authority that invests Sh5 billion in Kenya, and where the transfer of such investment is made after five years, the applicable rate shall be the rate that was prevailing at the time when the investment was made.
CGT is tax imposed on the transfer of property situated in Kenya, acquired on or after January 2015. A transfer of property is said to have occurred if property is sold, exchanged, conveyed, or otherwise disposed of in any manner (including by way of gift), whether or not for consideration. Further a transfer occurs on destruction, abandonment, surrender, cancellation, or forfeiture of property.
Examples of properties that incur CGT when transferred are land, buildings, securities, and shares. Property transfer for the purpose of securing a loan, transfer of assets between spouses, transfer by a creditor for the purpose only of returning property used as security for a debt or a loan, and transfer of shares listed on the Nairobi Securities Exchange are exempt from CGT.
The increase in the rate of CGT comes as no surprise as there have been numerous conversations surrounding the matter for a while. Among the reasons for the increase includes the comparatively higher CGT rates in other East African countries such as Uganda, Tanzania (10 percent for residents) and Rwanda’s rates of 30 percent. Kenya's CGT rate of 5 percent was relatively low.
The Government could argue that even with the increase, the CGT rate of 15 percent is still low compared to other East African countries and other African countries such as South Africa, Botswana, Egypt and Ghana.
In the Report on the Finance Bill 2022 by the Departmental Committee on Finance and National Planning, many stakeholders proposed that the CGT rate of 15 percent be reconsidered to a lower rate of 10 percent, citing that Kenya is yet to adopt a mechanism to address inflation adjustment in the increased CGT rate.
Furthermore, the stakeholders argued that the increased CGT rate would have a negative impact on Kenya's competitiveness as an economic hub and investment destination.
The committee recommended that the CGT rate be revised from 15 percent to 10 percent. Despite these recommendations from the committee and stakeholders, the Finance Act adopted a CGT rate of 15 percent.
The increase will see property owners, developers and investors pay higher tax charges upon the sale of properties. Consequently, the Government ranks as the main beneficiary due to an increase in the revenue collected.
Owing to the significant change made, the Government could have considered a gradual increase, say the 10 percent increase that was proposed by stakeholders.
This would have cushioned investors who will be massively affected and from whom the 200percentincrease is likely to elicit strong reactions as a significant portion of capital gains on disposal of properties is often attributed to a general increase in prices because of inflation.
The proposed increase should, therefore, have considered an inflation adjustment (indexation) to arrive at equitable value. In the present context, indexation refers to an adjustment of the asset value to eliminate the effect of inflation using the consumer price index.
However, we do still expect investors to invest in Kenya due to the comparatively lower CGT rate and the ease of doing business in Kenya (Kenya is ranked fourth in Africa for ease of doing business). In addition, it is considered to be the main economic hub of East Africa and is among the top fastest-growing African economies.
The writer is a Partner, Kieti Law LLP