- Lenders have asked the High Court to place responsibility of paying capital gains tax on loan defaulters upon auction of their land.
- Capital gains tax was re-introduced in January last year after more than a decade-long hiatus.
- The KRA is yet to file a response to the case but has instructed its in-house counsel, David Ontweka, to represent it in the suit.
Commercial banks are locked in a court case with the taxman over the collection of capital gains tax on land sold to recover bad loans, which has seen the lenders incur liabilities running into hundreds of millions of shillings.
Through the industry lobby, Kenya Bankers Association (KBA), the lenders have asked the High Court to place responsibility of paying capital gains tax on loan defaulters upon auction of their land.
The banks also want the court to scrap the directive that requires simultaneous payment of the levy and stamp duty during property transfers.
The banks have not indicated their total tax bill arising from the capital gains tax requirement, but this is estimated to run into hundreds of millions of shillings based on the many land auctions on defaulted loans.
Capital gains tax was re-introduced in January last year after more than a decade-long hiatus.
Its implementation has been problematic, notably resulting in its scrapping for stock market transactions.
The KBA chief executive, Habil Olaka, holds that the Kenya Revenue Authority’s (KRA) decision to order for simultaneous payment of capital gains tax and stamp duty after scrapping manual remittance of the two levies was misguided as it has hurt lenders.
Mr Olaka holds that the move shifted the burden of capital gains tax to lenders and purchasers, which is unlawful as neither of the two parties have the necessary information required to calculate any gain made from sale of land that was used as security for defaulted loans.
The KRA is yet to file a response to the case but has instructed its in-house counsel, David Ontweka, to represent it in the suit.
The KBA holds that banks do not own land sold to recover loans and do not also gain from the process hence should not be left with the burden of paying capital gains tax.
“The KRA’s decision to charge capital gains tax on a bank exercising its power of sale under a charge is unreasonable, unfair and influenced by an error in law. The KRA failed to take into account the fact that the bank is not the owner of the property and does not make a gain when exercising its power of sale under a charge,” Mr Olaka says.
The lobby insists that demanding simultaneous payment of capital gains tax and stamp duty infringes on the property rights of both banks and purchasers in such transactions.
“By requiring the simultaneous payment of both stamp duty and capital gains tax before presentation of the instrument of transfer for registration, the KRA is infringing on the right to property of both the bank and the purchaser and places the burden of paying the chargor’s (land owner) tax liability on either the bank or the purchaser,” the KBA adds.
The directive, the KBA argues, created confusion as either the bank or the purchaser must pay capital gains tax, without the benefit of information that would help in calculation of gain made under sale.
The KRA in a July 2016 clarification to the KBA argued that the Income Tax Act requires lenders to facilitate land transfers under loan recovery processes on behalf of their customer, which it insisted lays the burden of capital gains tax payment on banks.
Mr Olaka says that after the requirement for simultaneous payment of capital gains tax came into effect in October 2016, the KBA wrote to the KRA outlining why lenders are not liable for payment of capital gains tax when selling land to recover loans.
He says that to date, the taxman has yet to furnish the lobby with a response.
Since October 2016, payment of stamp duty and capital gains tax has been completed through the iTax system.
“The iTax system will not permit the payment of stamp duty on a transfer unless an acknowledgement number for the payment of capital gains tax on that sale is entered into the iTax system.
“Prior to the October 2016 announcement and the requirement that stamp duty be paid through the KRA’s iTax system, the KRA accepted payment of stamp duty on an instrument of transfer on a sale by the chargee pursuant to the chargee’s power of sale, without any conditions as to payment of capital gains tax,” the KBA adds.
The banks lobby also wants Justice George Odunga to order the KRA to accept payment of stamp duty without requiring the remittance of capital gains tax by lenders or purchasers.