Kenya banks face property loan losses as new i-tax rules protect defaulters

A Kenya Revenue Authority loophole has enabled mortgage loan defaulters to resist auction of their property, putting banks at risk of losing billions of shillings.

KRA’s shift of stamp duty and capital gains tax (CGT) payments to its online, i-Tax portal in October last year and its demand that both levies be paid simultaneously before transfer of property is effected has made it difficult for banks to auction defaulters’ assets.

Loan defaulters are, as per the new policy, required to upload details of capital gains on their property on the i-Tax portal before any transfer can be effected.

“Banks don’t have documentation such as the cost of the property to compute capital gains tax. This has made our transfer of assets very difficult,” said the Kenya Bankers Association chief executive, Habil Olaka, in an interview.

KBA is accusing the taxman of defying a court of appeal judgement that upheld the bankers’ argument that capital gains tax should be payable by property owners, and not holders of title deeds that are used as collateral security.

“CGT has to be paid by the owners of the assets who have these documents. Effectively as we stand today, KRA has not complied with the court ruling to adjust their system to separate the payment of the two levies,” said Mr Olaka.

The EastAfrican has also seen a petition that the Law Society of Kenya has written to Parliament seeking legislators’ intervention on the matter.

“This new procedure has led to delay in transactions as the required supporting documentation for the application is overly bureaucratic and subject to the arbitrary discretion of the KRA officers,” sates the petition signed by outgoing LSK president Allen Gichuhi.

Kenyan banks’ total loan portfolio rose 15 per cent to Ksh2.43 trillion ($24.3 billion at the beginning of 2019 from Ksh2.11 trillion ($21.1 billion) at the beginning of 2018, of which Ksh376.2 billion ($3.76 billion) was channelled into real estate compared with Ksh388.1 billion ($3.88 billion) at the end of 2017, according to Central Bank of Kenya’s Bank Financial Sector Stability report released last year.

The industry’s gross non-performing loans (NPLs) rose by 19.69 per cent to Ksh316.7 1 billion ($3.16 billion) from Ksh 264.61 billion ($2.64 billion) in the same period. Provisions for NPLs rose to the highest level of 44.7 per cent from 34.5 per cent in 2017.

The policy shift has thrown banks into a legal battle with the taxman after the lenders were left holding securities that they are unable to sell to recover their loans.

The bone of contention is whether a bank is supposed to pay CGT upon selling off an asset that is held as security for a loan.

Failure to liquidate collateral securities has inflicted more pain for banks that are already grappling with high NPLs largely due to an under-performing economy and the government’s delayed payment to suppliers. The total banks’ loan book stood at $27.5 billion as at November 2019 while NPLs had risen to $3.4 billion, as per CBK’s latest data.

According to the LSK, the fact that the i-Tax system only allows the owner of the property to initiate the CGT application ensures that innocent purchasers are mostly exposed to vendors who are keen on giving them difficulty in property acquisition.

“The view of the Law Society therefore is that the KRA should not impose unlawfully a requirement to require the payment of CGT prior to payment of stamp duty as there is no legal basis to do so,” said Mr Gichuhi.

“Additionally, the KRA should respect the rule of law and obey the court orders delivered on these matters. We have a pending contempt application against the KRA for breaching orders we obtained on the CGT issue restraining them from perpetuating illegalities.”

The High Court in a ruling delivered on March 13 2018 by Justice George Odunga ruled that the administrative action by KRA requiring simultaneous payment of stamp duty and CGT on sale of land by a chargee/lender pursuant to a chargee’s power of sale “is unreasonable, unfair and influenced by an error of law.”

The Court of Appeal upheld the decision of the High Court, which KRA had appealed against.

KRA, in court documents, argued that a lender is for all intents and purposes the proprietor of a charged property and hence the chargees/banks are obligated to pay taxes (CGT) in respect of the charged property.

KRA also argued that valuations of the property are carried out before the bank does the lending in order to establish the forced sale value of the property and hence calculation of CGT is not an impossibility on the part of a bank.
The capital gains tax was re-introduced in Kenya on January 1, 2015, after close to three decades’ suspension.

The KEnya Revenue Authority shift ed stamp duty and capital gains tax payments to its online portal in October last year and demands that the two levies be paid simultaneously before transfer of property is effected, which has made it difficult for banks to auction defaulters’ assets.
CGT was re-introduced in Kenya on January 1 2015, after close to three decades’ suspension.

From 2015, the applicable CGT rate has been five per cent payable on the 20th day of the month after a transaction is completed.

The government’s attempts to increase the CGT to 12.5 per cent through the Finance Bill, 2019 hit a brick wall after parliament rejected the proposal.