Treasury defies Parliament, triples property sales tax

The National Treasury

The National Treasury building in Nairobi.

Photo credit: File | Nation Media Group

Investors disposing of properties will be exposed to higher levy charges starting January next year after the Treasury defied proposals by lawmakers.

The Finance Act 2022, signed by President Uhuru Kenyatta last week, has set the capital gains tax (CGT) at 15 percent—defying an earlier recommendation by the Finance and Planning Committee of the National Assembly that the rate is set at 10 percent.

“Section 34 of the Income Tax Act is amended— (a)! in subsection (1), by deleting the expression “five percent” appearing in paragraph (j) and substituting therefor the expression “fifteen percent” the Finance Act,” the Finance Act 2022 said.

The CGT is the levy on the profit that an investor makes when an investment is sold. It is owed for the tax year during which the investment is sold.

This means the rate, applied on net proceeds from the sale of property, will triple from January next year after President Kenyatta endorsed recommendations by the Treasury.

Testing the waters

The State re-introduced CGT at five percent in 2015—a move that was widely viewed as a way to test the waters as part of a wider scheme to boost its revenue collection performance.

Buoyed by gains from the maiden review, there were unsuccessful attempts to further increase the rate to 20 percent and 12.5 percent through the Income Tax Bill 2018 and the Finance Bill 2019, respectively.

Analysts pointed out that a review of the CGT rate to 15 percent would impact transactions in the real estate sector.

“With the increased pressure to collect more tax revenue, it comes as no surprise that the government sees this as a low-hanging fruit” a consultancy firm, Deloitte said in April in a commentary on the Finance Bill 2022 which has now been signed into law.

“The significant increase in CGT rate could also slow down investment and transactions in certain sectors such as real estate” it added.

The raised tax hands the Kenya Revenue Authority a boost in revenue collection but has left property developers at a disadvantage.

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