Investors paying capital gains tax (CGT) on property have once again been left exposed to high tax charges after the Treasury failed to introduce rules that would allow adjustment of the buying price for inflation.
Treasury CS Henry Rotich announced in the Budget last week that the rate of the tax has been adjusted upwards from five to 12.5 percent, which will more than double the tax obligation for those looking to sell property or land.
Some of the capital gains can, however, be attributed to inflation — which means the value of money decreases over time — hence the decision by some tax jurisdictions such as UK, Australia and Uganda to adjust the base (original) buying price of a taxable property upwards (indexation) for tax purposes to mitigate the inflationary distortion.
“Though the CS announced that the change was proposed in order to align with the regional rates, he missed a valuable opportunity to introduce indexation to allow adjustment of gains to mitigate the impact of inflation,” said consultancy firm KPMG in a budget brief.
Experts have been calling for the inflation adjustment since CGT was reintroduced in 2014 after a 30-year suspension, pointing at the rapid rise in property and land price in the country that has made some of the buying prices sound unrealistic (for tax valuation) compared with the present value.
Thus, in avoiding indexation while adjusting the tax rate upwards, the CS has handed the Kenya Revenue Authority a boost since this will increase the taxman’s take significantly, but leaves taxpayers at a disadvantage.
The proposed increase is expected to boost the Treasury’s CGT revenue by one-and-a-half times. This line of tax has so far failed to raise much revenue for the government, accounting for about 0.5 percent of total tax revenue in the past four years.
Analysts, however, see a silver lining after the tax rate increase, saying it might encourage more firms looking to sell make exits through the stock market, where equities are exempted from CGT.
“This is particularly true for large transactions where NSE transaction costs could be much lower than the capital gains tax,” said Standard Investment Bank in a budget review.