Nairobi — Kenya's property developers are celebrating the defeat of the government proposal to reintroduce capital gains tax.

The 10 per cent tax, which was suspended in 1985, was reintroduced by Finance Minister Amos Kimunya in this year's Budget as one of the key measures through which the government would raise revenue to run its ministries until the expiry of the current financial year in June next year.

It was to be levied on the gains arising from the disposal of property - the excess of sales proceeds on the original property cost.

However, Members of Parliament on November 9 shot down the proposal - alongside a number of other proposals contained in the Finance Bill 2006 - arguing that it would impoverish small investors who want to sell their houses and invest in other sectors.

Last week, the chairman of the Kenya Private Developers Association (KPDA), Daniel Ojijo, said that by voting out the clause aimed at reintroducing the capital gains tax, the MPs, unlike the government, demonstrated that they are in tune with the reality of the plight of real estate developers in the country.

According to Mr Ojijo, the tax would have substantially increased housing prices since developers would have been forced to transfer the burden to the buyers. This, he says, would have put housing out of reach of many potential homeowners.

"We are overjoyed. There was a lot of anxiety among developers over plans to reintroduce the capital gains tax. It would have reversed the gains that the private sector has achieved over past years," Mr Ojijo told The EastAfrican last week.

The defeat of the proposal to introduce the tax, which was to be effected on January 1, 2007, is a big blow to the government, which had said it would not reverse its decision to introduce the levy.

Mr Kimunya has always maintained that developers, like other taxpayers in the country, must pay tax for the benefits they receive from the government. Such benefits, he said, include provision of infrastructure such as roads, sewerage, water and electricity. They also include security, healthcare and other services that make a neighbourhood attractive and habitable.

Mr Kimunya also argued that the tax would discourage speculators who had invaded the country's property sector.

But private developers - who are the main players in Kenya's real estate sector - argued that reintroducing the tax was a sure way of killing the sector, which they say is already overburdened by numerous levies.

Property market experts say that the purpose for which the capital gains tax was to be levied was not justifiable, since most of the services provided are either poor or inadequate.

Currently, developers have to contend with high costs of land, stamp duty (at four per cent), high transport costs, value added tax (at 16 per cent) and the cost of putting up infrastructure - estimated at 30 per cent of the total construction cost - for a new housing project.

It is the high costs, according to experts, that have led developers to shy away from providing housing for the middle and low income classes.

According to Mr Ojijo, the news of the reintroduction of the levy had led some developers to contemplate switching to other investment options like stocks and shares, where there are no "punitive" taxes like in the property sector.

"What the real estate sector needs are tangible incentives, not punitive levies," he said last week, noting that currently, there is hardly any developer who can afford to put up a house whose selling price is below Ksh1.5 million ($20,548).