Capital gains tax expected to hit long-term investment

 

Houses in Runda. A five per cent tax will be charged on gains from the sale of shares, property and oil and gas blocks as from January 1, 2015. PHOTO | FILE 

By JOHN GACHIRI

In Summary

• The rate will be at five per cent, but both the Treasury and KRA are yet to come up with a schedule on how the re-introduced tax will be calculated.
• Brokers and property dealers have said the new tax will slow growth for the industries that have reaped huge gains for investors over the past couple of years.

The Treasury has been advised to lower the capital gains rate for long-term investments to encourage financing through infrastructure bonds and other vehicles.

A paper on the capital gains tax by Old Mutual Services (OMS) says government and the Kenya Revenue Authority (KRA) should tax such investments at a lower rate as they are more productive to the economy as opposed to speculative ventures.

“Given the need to grow our economy in the long term, the long-term capital gains need to be taxed at a lower rate than short-term gains in order to provide more incentive to invest in the companies that build the economy, rather than trying to make quick profits by speculating on stocks,” says the OMS paper.

President Uhuru Kenyatta signed the Finance Bill into law, allowing taxing of gains from sale of shares, property and oil and oil blocks as from January 1, 2015.

READ: Kenya's president approves 5pc capital gains tax

The rate will be at five per cent, but both the Treasury and KRA are yet to come up with a schedule on how the re-introduced tax will be calculated.

Tax experts have proposed determination of a base year that will be used to calculate how much tax is to be paid. OMS says the process of coming up with an index is unclear and complicated, especially where assets were bought a while back.

“In terms of assets or properties which were acquired decades ago or where the consideration for such property cannot be evidenced, the determination and assessment of capital gains tax will be tedious and it remains to be seen how the KRA will deal with valuations for transfers of this nature,” says OMS.

Brokers and property dealers have said the new tax will slow growth for the industries that have reaped huge gains for investors over the past couple of years.

Lee Karuri, chairman of real estate firm Home Afrika, said the re-introduction of the five per cent tax will be felt by the end user since developers will load the extra cost to the price of their products.

He added that the new tax will be another blow to the industry this year since the Treasury had earlier introduced more taxes on imported steel, a key raw material in house construction.

Treasury secretary Henry Rotich increased taxes on imported steel and iron products by 25 per cent in June to protect local mills.

Previously the imported products were zero-rated or were charged a duty of up to 10 per cent.

Analysts at Dyer and Blair Investment Bank, however, have said the five per cent tax is not big enough to discourage investment at the Nairobi Securities Exchange as it is lower than other African countries such as South Africa which has a 10 per cent rate and Zambia (35 per cent).

jgachiri@ke.nationmedia.com