How Treasury plans to net more rental tax revenues

National Treasury

The National Treasury Building in Nairobi. 

Photo credit: Pool

The Treasury is betting on recruitment of more property agents to help Kenya Revenue Authority net more tax evading landlords amid huge shortfalls in the projected collection from rent.

It said compliance among property owners was off the envisaged levels despite the payment process being “simplified”, prompting a review of the approach taken by the taxman.

The Treasury says its latest analysis, which covered the year 2022, collections from residential income taxes fell short of projections by Sh27 billion.

This is after the KRA “simplified” the compliance by requiring residential property owners generating an average of between Sh24,000 and Sh1.25 million every month to pay tax at the rate of 7.5 per cent of the gross earnings.

The current rate took effect in January following changes in the Finance Act 2023 that lowered it from the previous 10 per cent.

“The simplification was introduced to enhance compliance. Though it has increased the number of taxpayers, it has not achieved the envisaged compliance [in remitting rental income tax],” Treasury wrote in the 2024 Budget Policy Statement.

“To address compliance challenges in rental income taxation, the government will enhance the registration of property agents, mapping of properties, and leveraging on technology. In this regard, and to ensure fairness and equity, the government will review taxation of residential rental income.”

Section 6A of the Income Tax Act further requires property owners with annual rental income of Sh288,000 and Sh15 million to file a monthly tax return declaring the gross earnings from which tax payable is computed at the rate of 7.5 per cent.

The property owners have the option to pay taxes at the standard rate of 30 per cent of profit.
Landlords have, however, complained of unfairness which has hindered compliance.

A property owner in Nairobi, who did not want to be identified, said paying tax on gross rental income will push most landlords targeted by the taxman out of business. An average of 30 per cent of gross monthly collections from rent goes to servicing loans he says. 

“If the bank takes 30 per cent of [monthly] rent we collect, the KRA takes 7.5 per cent of gross income or net, then there is realtor [agent] fees on top of repairs and maintenance here and there, what is the landlord left with?” posed the landlord who owns a residential flat in Nairobi’s Eastlands area with a gross monthly income of Sh144,000 when fully occupied.

“That's why we are finding it difficult to pay this tax. It would be fair if the share they are asking for is based on net income not gross.”