Rental income tax one of untapped frontiers in revenue collection

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DONHOLM IN NAIROBI KENYA

The population of urban dwellers in Kenya, just like in many parts of the world, has increased steadily over the years. Data by Worldometers (2019) shows that about 6.2 million people lived in the Kenyan urban dwellings in 2000. This was 19.8 percent of the entire population. 

Worldometers states that currently 14 million Kenyans live in the urban regions, with the percentage of urban dwellers standing at 27.1 percent. 

The rapid increase in these numbers is one of the factors that have caused exponential growth in real estate, with a bias to rental residential premises. This position is corroborated by the many upcoming residential premises in the outskirts of major urban settings. 

Without a doubt, investment in this sector, just like most sectors of the economy, generates substantial taxable income. But the kind of vibrant growth witnessed in real estate does not directly translate to the amount of tax collected from the sector.

For quite some time, investors in rental, commercial and residential premises were required to remit taxes and file corresponding tax returns annually. Government later separated premises and introduced a simplified tax regime for residential rental premises through the Finance Act 2015. The regime, known as Monthly Rental Income (MRI) tax, came into effect in January 2016. Under the model, investors in residential properties are required to remit 10 per cent of the gross rent collected to the Kenya Revenue Authority (KRA) on a monthly basis. 

It is important to note that MRI tax is due on or before the 20th day of the month following the month the rent was received. Just like any other tax obligation, the legislation that administers MRI tax, Income Tax Act Cap 470 Section 6A, imposes a penalty of Sh20,000 or a five per cent of the principal tax due on defaulters. The higher of either penalties takes precedence.

Besides being accounted for monthly, the MRI tax regime is simpler than the former regime where tax payable was calculated using a graduated scale. Onus was also on landlords to maintain a detailed book-keeping record for easy accounting of their records. However, with the simplified regime, landlords are required to maintain minimal book keeping thereby doing away with complexities associated with the former regime. Minimal book-keeping also means less operational costs for the landlords. MRI tax is also a final tax which means that a landlord shall not be required to account for MRI at the end of the financial year.  

Since inception of MRI in 2016, KRA has put in place an elaborate sensitisation programme geared towards educating and facilitating landlords for easier compliance with the simplified regime. Sensitisations are held periodically to cater for newly recruited landlords with a view to enlightening them on the tax obligations they are liable to. The sessions are also of great benefit to already recruited landlords who might need a refresher. Just like with other tax obligations, taxpayers under MRI are required to self-assess and remit the required percentage of their income as tax within the required time. The self-assessment regime is purely based on trust between the taxman and a taxpayer, and stems from KRA’s mission of building taxpayers’ trust through facilitation. 

Within the six months of the 2015/2016 when MRI was effected, KRA recruited close to 30,000 landlords. In the next three financial years ending 2020/2021, KRA projects to recruit more than 66,000 landlords. Recruitment of more landlords is one of the tax-base expansion initiatives that KRA is banking on to enhance revenue collection across the board.

For this to succeed, there is a need for more landlords to voluntarily come on board and enrol for monthly rental income. When enough revenue is collected, the country will not need to borrow to sustain herself. (

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