Capital Gains Tax: The Good, The Bad and The Ugly

Last week, the Kenyan parliament voted to reintroduce capital gains tax. It had been suspended 29 years ago in order to spur growth in the securities and property market.

The motion is currently awaiting President Uhuru Kenyatta’s signature after being approved by parliament.

Like Zacchaeus the tax collector, CGT has not been very popular with Kenyans. Source:familiesinchrist.com
Like Zacchaeus the tax collector, CGT has not been very popular with Kenyans.
Source:familiesinchrist.com

What is capital gains tax?

Capital gains tax is a levy that the state will collect from companies and individuals on the gains they make from the sale of real property and marketable securities (such as shares and bonds).

The proposed tax has been set at 5%, which is half the amount taxed prior to 1985. The chairman of the Parliamentary Finance Trade and Planning Committee Benjamin Lang’at has since then, clarified that the tax applies to all forms of assets including bonds as well as listed and private shares that are traded over the counter. Nevertheless, parliament rejected the taxing of capital gains tax on property that was compulsorily acquired by the government for infrastructure development terming it as unfair to those whose land was taken away. In the Hansard, the MPs state that levying the tax would result in the individual who lost their  land being unable to go back to the same state they were in before the land was acquired.

The Good

The government will raise more revenue. Among the supporters of the motion was Suba MP, John Mbadi  who last year had unsuccessfully attempted to introduce the tax. He was happy that this year a revenue raising opportunity was not foregone.

Looking at its peers, Kenya was one of the few countries in Africa that do not currently levy capital gains tax (such as Mauritius, Seychelles, and Namibia). Within the East African region, capital gains are taxed at 30 percent in Uganda, and 20 percent in Tanzania. In Rwanda, capital gains is not taxed on listed securities though it attracts a 30% rate on commercial immovable property. The two largest african economies, namely South Africa and Nigeria levy the tax at a 10% rate.

The Bad

Not all of the firms that should pay tax actually do so, therefore, the increased tax base does not solve the problem of tax evasion in Kenya. Those who pay taxes already feel overtaxed and those who don’t pay will most likely not pay the capital gains tax.

Understanding the application of the tax may prove to be not a walk in the park. This could be particularly challenging in new asset classes such as futures after the establishment of the planned derivatives market and usher in opportunities for corruption.

The Ugly

There will be a reduction in gains for investors in Kenyan markets such as the Nairobi securities exchange. Imagine that you invested KES 100 in the stock market; you will pay the first 2 percent to the stock broker as a brokerage fee to buy a share, then pay another 2 percent to sell the same share, and from your profit after that you would have to deduct the 5% capital gains tax.

If approved, the capital gains tax will come into effect January next year; therefore you may need to consult a tax expert to understand the effect it will have on your portfolio.

 

 

 

 

 

 

 

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