Sort out the grey areas in the capital gains tax

In a bid to widen the tax base so as to raise government revenue and reduce opportunities for tax planning and avoidance, capital gains tax has been re-introduced.

This is a tax chargeable on the gain a company or an individual makes on the transfer of property.

The rate of tax is five per cent of the net gain and it cannot be offset against future tax liability. There is an avalanche of contentious issues with this tax.

There was a similar law in 1975 when the economy was much different from the present. Many of the provisions may not be applicable or relevant now.

There are economic realities such as inflation rates that the new capital gains tax is sweeping under the carpet.

For example, the exemption for sale of land by an individual where the proceeds is less than Sh30,000.

Whereas 40 years ago land was cheaper, the reverse is true now where the value of land is on an upsurge and so no taxpayer is going to benefit from such an exemption. The law clearly has no provision for inflation and time value for money.

ARCHAIC PROVISIONS

To enable calculation of base costs of chargeable assets on property, capital gains tax requires a heap of records to be presented, among them, copy of sale/transfer agreement, and proof of the incidental costs related to the acquisition and property transfer and report from a registered valuer.

These archaic provisions disadvantage taxpayers who may have difficulties in retrieving such records especially in transactions conducted many decades ago.

In fact it doesn’t indicate the period for such record keeping, so should the taxpayers assume it is five or 10 years?

And what happens to some transactions on property that are done without records such as casual labour force? This is the rationale why the income tax Act’s Eighth Schedule should be overhauled and harmonised with other tax laws in the country.

In the event of a loss, the law states that such loss may be carried forward to be offset/deducted against a gain of a similar nature (that is, a capital gain) at a future date with consequent restrictions on how long relief can be claimed on capital losses.

A requirement in the case of investment shares, to pay the tax within 20 days following the month after the transfer was made, is another grey area of the capital gains tax as it lacks clear definition of tax point.

The renaissance of capital gains tax sees the return of an unnecessary, outdated and complex tax which may discourage inward investment.

The five per cent tax on the net gain on property and marketable securities sales will not only increase taxation for individuals and businesses, but will be very complex.

The identification and valuation rules for disposal of investment shares is overtly complex and onerous in practice.

That a taxpayer does self-assessment to determine the gain upon which tax is computed then subject to Commissioner’s confirmation of correct gain as the basis of tax computation, makes the process virtually difficult to administer.

There are also some contradictions between the Finance Act and the Eighth Schedule of the Income Tax Act that need clarification.

For instance, while the Finance Act provides for a capital gains tax rate of five per cent, the Eighth Schedule in Part II provides for a 7.5 per cent rate on gains from investment shares.

The government ought to find a way in which all parties come up with a harmonised method which addresses some of these ambiguities

Michael Mburugu is a tax partner at PKF Kenya