Economy

Audit firm KPMG seeks capital gains tax adjusted to inflation

tax

The government is trying to widen the tax base to fund President Uhuru Kenyatta’s Big 4 agenda. FILE PHOTO | NMG

Consultancy firm KPMG has asked Parliament to consider indexation in determining tax obligation for those looking to sell property or land.

Indexation is an adjustment to the capital gains calculation to eliminate the effect of inflation using the Consumer Price Index (CPI), which measures the cost of living in the economy.

The Finance Bill has proposed to more than double the tax obligation of property sellers from the current five percent to 12.5 percent.

“Our proposal is that we introduce indexation in calculating gains since this is best practice in other jurisdiction including our neighbours Uganda,” KPMG Partner Peter Kinuthia told Parliament.

The rise in the tax rate came as no surprise since Kenya has maintained a low rate compared to the rest of the region. Uganda and Rwanda, for example, apply Capital Gains Tax (CGT) rates of 30 percent.

The experts, however, reckon the 150 percent increase is steep rise and punitive on investors to impose the tax on inflation.

Some of the capital gains can, however, be attributed to inflation —which means the value of money decreases over time— hence the decision by some tax jurisdictions such as UK, Australia and Uganda to adjust the base (original) buying price of a taxable property upwards (indexation) for tax purposes to mitigate the inflationary distortion.

The government is trying to widen the tax base to fund President Uhuru Kenyatta’s Big 4 agenda.

The move is also informed by the desire to tax wealth, which is aligned with international best practice of an equitable tax system.

Experts have been calling for the inflation adjustment since CGT was reintroduced in 2014 after a 30-year suspension, pointing at the rapid rise in property and land price in a country that has made some of the buying prices sound unrealistic (for tax valuation) compared with the present value.

Experts reckon that, in avoiding indexation while adjusting the tax rate upwards, the Treasury has handed the Kenya Revenue Authority (KRA) a boost since this will increase the taxman’s take significantly, but leaves taxpayers at a disadvantage.

The proposed increase is expected to boost the Treasury’s CGT revenue by one-and-a-half times. This line of tax has so far failed to raise much revenue for the government, accounting for about 0.5 percent of total tax revenue in the past four years.