Parliament returns capital gains tax after 36 years

Politics and policy

Suba MP John Mbadi: I am delighted that the Jubilee government has finally seen the sense in having this tax. PHOTO | FILE 

By EDWIN MUTAI, emutai@ke.nationmedia.com

In Summary

• The new law, which was passed through an amendment to the Finance Bill 2014, sets companies and individuals on the path to paying taxes on the proceeds of property sold beginning January 1, 2015.
• The tax will be charged “at the rate of five per cent and shall not be subject to further taxation”.
• Kenya removed capital gains tax from its laws in 1978 hoping to use it to attract investment in its stock market, mining licences and real estate among other sectors.

Parliament Wednesday amended the law to bring back the capital gains tax 36 years after it was abolished.

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The new law, which was passed through an amendment to the Finance Bill 2014, sets companies and individuals on the path to paying taxes on the proceeds of property sold beginning January 1, 2015.

Kenya removed capital gains tax from its laws in 1978 hoping to use it to attract investment in its stock market, mining licences and real estate among other sectors.

Members of Parliament Wednesday brought back the tax by amending the Eighth Schedule of the Income Tax Act.

“Subject to this Schedule, income in respect of which tax is chargeable under Section 3(2)(f) is the whole of a gain which accrues to a company or an individual on or after January 1, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before January 1, 2015,” says Clause 22 of the newly enacted Finance Bill. 

The tax will be charged “at the rate of five per cent and shall not be subject to further taxation”. Tax experts estimate that the KRA could rake in additional Sh9 billion annually from this tax.

The amendment comes after several past attempts to bring back the tax died on the floor of the House – rejected by the MPs.

The new law provides that a firm acquiring more than 50 per cent stake in mineral blocks will pay a premium tax, technically called net gain tax, on the value of the transaction after deducting attendant costs.

READ: Treasury targets capital gains tax in Finance Bill

If President Uhuru Kenyatta signs the Bill into law, deals involving stakes in oil and other mineral blocks will for the first time be subjected to capital gains tax as the Treasury looks for ways of collecting more revenue from natural resources.

Wednesday’s amendments to the Finance Bill will also see withholding tax on dividends from mining operations rise from 10 per cent to 20 per cent.

The proposed law says that where the net gain is less than 50 per cent and the stake less than 50 per cent, the income tax payable will be determined by a formula that takes into account the stake sold and the value of the block.

Passage of the Bill means that the government could collect a lot more revenue from property sales in the booming real estate sector.

MPs rejection of the capital gains tax has in the past been seen to be backed by powerful business interests with huge presence in the targeted sectors of the economy.

Suba MP John Mbadi supported the amendment, saying the Jubilee government had lost billions of shillings in revenue following last year’s rejection by fellow MPs of his attempt to reintroduce the tax.