Kenyan MPs double tax on sale of property and securities
Thursday June 16 2022
A parliamentary session in Kenya. PHOTO | JEFF ANGOTE | NMG
Investors in Kenya are looking at lower yields from sale of property, privately-held shares and marketable securities after the parliamentary Finance and Planning Committee approved a proposal to double tax on sale of related assets.
The Capital Gains Tax (CGT) levied on sale of property or shares by private owners will rise to 10 percent from January next year, something analysts say may lower frequency of such transactions or discourage them altogether.
Extra burden
Adding to the already challenging Kenyan capital markets environment –which has suffered massive foreign outflows, a falling benchmark index and tenacious investor apathy – the net tax could be an added burden.
Previous attempts to raise the CGT in 2018 and 2019 failed, but now increasing pressure to raise more tax revenue and narrow down the budget deficit has given latitude for this reform.
The parliamentary committee rejected a proposal by manufacturers and experts to allow for the introduction of inflation adjustment in calculating the CGT – technically known as indexation. Now there are fears that will expose investors to higher tax rates on the cost of assets.
Eric Musau, head of research at Nairobi-based Standard Investment Bank, told The EastAfrican that the higher tax rate is likely to hit both property and capital markets investors, encouraging other forms of investment like the emerging real estate investment trusts (REITs).
“Indexation will ease the impact of the increment of the capital gains tax for direct owners of property,” Mr Musau told The EastAfrican.
He said institutional investors are increasingly likely to consider REITs in coming years.
“A higher capital gains tax will not affect a directly-owned property the same way as one through a REIT. A REIT offers a much more tax efficient mechanism as no capital gains tax (among other taxes) is applicable,” he added.
Inflation
According to a report by audit and tax advisory firm Deloitte, although Kenya’s CGT rate has been the lowest in the region, it does not provide for inflation adjustments.
“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,” reads the report that analysed the Kenya Finance Bill 2022.
Uganda’s capital gains tax is charged at 30 percent, but is adjusted for inflation as per the initial cost or the market value of the asset as at March 31, 1998.