How will capital gains tax affect common man?

Opinion and Analysis

An oil rig worker at Ngamia 3 in Turkana. Africa Oil says a capital gains tax of between 30 and 37.5 per cent may discourage explorers. PHOTO | FILE 

By LENA KIMENCU

President Kenyatta recently signed the Finance Act 2014, which will see the revival of Capital Gains Tax. The tax will focus on property transactions, real estate, mining industry and capital markets.

The tax rate will be at five per cent, which will be half the previous rate that was suspended in 1985.

The tax was suspended in a bid to attract investments in capital markets, real estate and mining sectors. So the question that this development begs is, has Kenya’s financial standing reached an optimal point that maybe there is no more need to attract investors to these particular sectors?

The answer of course is a resounding no. Actually far from it, as it stands Kenya has a very huge budget deficit and a huge debt ratio of 57 per cent which increased from 52 per cent after the Eurobond was issued.

What will be of interest is how this tax will affect the common Wanjiku. It will be interesting to see how this tax will affect the real estate, mining and capital markets.

The real estate sector will likely see an increase in its already escalated prices. However, on the positive side this might also reduce the level of speculation of prices in the sector.

It could be argued that the tax will shun investors from the still budding mining sector in Kenya. However as it is, the sector is still very young and the resources (such as oil) are in demand all over the world and therefore the impact of taxation will be very small in derailing the exploration.

It is also, hopefully, through this tax that average Kenyans will be able to benefit from the resources in their land because otherwise most of the exploration and profit will go to foreign investors. This is a problem that has affected many developing African countries such as the Democratic Republic of Congo and Chad.

Since the Act is not explicit on how capital markets will be affected, the effect of the tax in the Nairobi bourse will depend on how KRA will interpret the law.

In case the tax is to be imposed most local and foreign investors will feel the pinch the hardest. Kenya has followed many other African countries in adopting the tax. For instance South Africa adopted it in 2001. Currently in East Africa most countries have adopted this tax.

For instance Tanzania has hers at 20 per cent while Uganda’s is 30 per cent. Notably though some countries such as Mauritius and Seychelles do not impose this tax. This could mean that Kenya could lose on its attractiveness as the gateway to East Africa to these two islands.

The writer is a tax advisor at Nexus Business Advisory. The views expressed here are her own and do not necessarily represent the views of Nexus Business Advisory.