28 November 2012

Kenya: Tax On Capital Gains in the Offing

Capital gains tax may be reintroduced in the next financial year as the taxman seeks additional revenue streams to finance the swelling public expenditure.

Commissioner general John Njiraini said on Wednesday KRA is exploring new avenues from which to raise more revenues, and is toying with the idea of taxing capital appreciation.

Capital gains tax was suspended in 1985 but there are growing indications that it may soon be brought back. The tax is normally charged on non-inventory assets such as bonds, stocks, precious metals and property acquired at lower prices than re-sale.

"Going forward, if we want to raise more revenue towards implementing Vision 2030 and the new constitution, we must look for areas that have potential," Njiraini told reporters on Wednesday.

This means that KRA will now rope in owner-occupiers of residential properties and landowners who sell after some time even if the initial intention for purchase was not to re-sell.

Currently, such owners only pay a stamp duty fee at the rate of two and four per cent when they transact, depending on whether the property lies within a county council or a municipality and city council.

"People are making a lot of money in capital gains but are not paying tax such as on sale of property," said Njiraini, giving the clearest indication yet on intention to reintroduce capital gains tax.

He however dispelled fears that KRA would go all-out to target the real estate sector only, owing to its increased focus on the sector in recent months. The tax category would also affect investors at the NSE.

"Our ambitions will be matched by our intentions," he said. A blanket exclusion from tax on capital gains by the 1985 Income Tax Act amendment brought confusion to the real property sector, with many property owners misconstruing it as including gains from property business.

KRA issued guidelines in June 2011 to draw a line between what it deemed as 'capital gains' and what it considers as 'business profit' in property sale transactions.

"The key characteristics that make the distinction include frequency of transactions and the length of time a property is held prior to its disposal," said Njiraini.

While Kenya does not deduct tax on capital appreciation, Uganda and Tanzania rates are 30 and 20 per cent respectively. South Africa deducts 40 per cent on capital appreciation, probably the highest on the continent.

The taxman is now seeking databases with relevant information on who owns what property, with capability to show the status of a property's development and compare an owner's tax declarations with their property holdings.

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