15 June 2012

Kenya: KRA to Hunt Down Landlords

The Kenya Revenue Authority has set its eyes on landlords in its attempt to widen the bracket of those paying taxes. Finance minister Njeru Githae said KRA will embark on mapping residential and commercial areas to rope in property owners most of whom have not been paying taxes on the income gained from their rental properties. "... over the recent past, many patriotic Kenyans have invested heavily in real estate thereby promoting access to housing for our people.

"To ensure fairness and also allow this class of citizens to contribute toward our nation building, the Kenya Revenue Authority will shortly embark on mapping out all residential and commercial areas and implement a comprehensive strategy to ensure that all landlords are effectively brought into the tax net and all rental income taxes due are paid," said Githae in the budget statement he presented in Parliament yesterday..

Landlords, particularly in the residential sector, are required to declare and pay income tax on rental income, but KRA said in April that that some landlords have been evading tax payment.

Commissioner General John Njiraini said then that the authority was planning to catch all errant landlords and property developers who did not pay required taxes. "They will be caught... it is really a question of time," Njiraini warned at the time.

The KRA has already undertaken a pilot survey involving 100 properties in one of Nairobi's residential neighborhoods which revealed that less than 40 per cent of the landlords and developers had complied with tax requirements.

The authority is using data from other agencies such as the Ministry of Lands, utility companies and the City Council of Nairobi to track down all the property owners in Nairobi before rolling out the system in the rest of the country. Real estate agents and tax experts said Githae's proposal will lead to an increase in rents.

"Rent increments are definitely in the offing particularly in the residential sector because commercial properties already pay taxes for rental income exceeding the set threshold of Sh5 million per year," said Timothy Mutisya, a property manager at Lloyd Masika, a Nairobi-based real estate services firm.

Mutisya said most residential properties are built on loans and taxing rental income would see most of the developers who are servicing loans to pass the extra tax burden to their tenants.

"Existing tenants in residential houses may try to resist at first but they will have to oblige in the end. I'm almost sure that more than 80 per cent of the landlords will adjust rents," he said.

The tax burden to landlords comes when the cost of loans has risen and borrowers for mortgages and construction loans have been pushed to make higher monthly repayments in adjusted tenures.

KRA may not accord any special thresholds to both commercial and residential property owners as rental income will be taxed under income tax. "They will pay taxes in the normal way. There are tax rates applicable for all incomes which is graduated with income bands," Kennedy Onyonyi, KRA's deputy commissioner for communication, told The Star on phone yesterday.

Real estate and the housing sector has been targeted as the key source of additional revenue in the 2012/13 fiscal year. Public expenditure will now reach a record Sh1.45 trillion as it also factors in the costs of a devolved government.

Audited government revenues showed land rent revenue alone dropped to Sh1 billion in the 2010/11 financial year compared to Sh1.1 billion in the preceding year, prompting the exchequer to seek alternative means by tightening the noose on landlords.

Apart from landlords and developers, Githae has also factored in tax revenue to be paid by constitutional office holders and other state officers like judges and senior military officials who will now be required to pay taxes.

Yesterday Githae directly avoided increasing or decreasing the normal taxes on commodities such as food stuffs or 'sin' taxes -the taxes on alcohol , cigarettes and other such commodities giving consumers a relief.

He reduced taxes on importers of second hand clothes popularly known as Mitumbas. Githae directed KRA to henceforth charge an import duty at a rate of Sh1.1 million on a 20 foot container of second-hand clothes, down from the current Sh1.9 million. He said the measure will help to protect small scale traders and the youth many of whom are involved in the trade of such goods.

The minister also removed import duty on set top boxes for televisions which will help conversion into digital TV. This is expected to drastically cut the prices of the set top boxes which currently costs an average Sh5, 000.

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