BY James Muliro
The capital gains tax (CGT) continues to elicit more debate regarding its efficacy especially on the sale of equities. This comes even as tax experts say the government could raise the tax in June and thereafter in a gradual process meant to align it with other regional countries.
The CGT was ‘sneaked’ into the Finance Bill 2014 and became effective from January 1, 2015. It levies a 5 per cent charge on the net gain from sale of property and marketable securities like shares and bonds. Residents are charged 30 per cent net gain while non-residents pay 37.5 per cent from sale of mining rights.
A number of analysts have called for the suspension of the tax to allow for consultations and public participation on the CGT before it can be reintroduced. The analysts have poked holes in the manner in which the CGT was introduced in the market, saying it was sneaked into the Finance Bill 2014, without the input of stakeholders.
“It must be suspended to allow the stakeholders to participate. Capital gains tax in itself is not a bad thing but if it was introduced in a proper way, then it would benefit the government in the way it is intended,” partner at HHM Oraro advocates Andrew Oduor indicates.
Some of the prickly concerns in the tax include a provision which indicates stockbrokers must retain 7.5 per cent of the gross proceeds in the sale of shares, whereas law puts the tax at 5 per cent on the net gain accrued from sale of securities. Some sections of the tax relating to property acquired as far back as 1975 also remain contentious due to many factors like lost or misplaced records, massive appreciation in the value of land and inflation.
On February 18, the council of the Kenya Association of Stockbrokers and Investment Banks (KASIB) said it would discontinue trading from February 19 until the standoff between themselves and the taxman is resolved. However, the brokers later rescinded their plans to suspend trading at the Nairobi Securities Exchange (NSE) for the sake of maintain “sanctity and stability” in the capital markets.
“Following consultations, and in the interest of maintaining the sanctity and stability of the capital markets in Kenya, the Council of KASIB has further resolved that they shall not suspend trading services and that the Exchange shall operate as normal on February 20, 2015,” the brokers said on February 19.
According to Maurice Wangutusi, a tax director at Deloitte East Africa, any effort to increase the tax basket is noteworthy. However, proper process ought to be observed before such measures can be considered. He further indicates that given the fishy manner in which the tax was introduced, it could possibly be raised to 10 per cent in June in another suspicious manner to bring it to the same level like that in other countries in the East African region.
“What we are saying is that even if this is done, it should be in a transparent manner where proper consultations have been carried out,” Mr. Wangutusi noted.
The issue regarding whether collection and remitting the tax on sale of marketable securities should be the responsibility of stockbrokers remains contentious. Currently, stockbrokers are in court challenging the decree that they should collect the tax to behalf of the taxman. They argue this process is impractical and expensive and could possibly land them in prison. They have maintained that it is impossible for them to collect and remit the tax to the revenue authority.
Recently, the Institute of Certified Public Accountants of Kenya (ICPAK) added its voice to the debate. They have emphasized the need and importance of necessary of consultations amongst stakeholders regarding the tax. According to ICPAK, a good tax should be fair, simple, convenient and certain and should be free of glaring gray areas.
“Issues that stakeholders have raised need to be considered and dealt with. We request the government to consider the views raised by stakeholders in harmonising the implementation of Capital Gains Tax and making it compatible to good principles of taxation,” Benson Okundi, ICPAK chairman noted.
Soon after the passage of the CGT, Africa Oil, which is prospecting for oil in Kenya together with Tullow, said it would engage with the government to consider potential legislative changes. The changes are expected to bring the tax rate to a level that is able to meet the government’s requirements to achieve revenue from such transactions while promoting development of the petroleum industry. Besides expected to erode investor confidence and cause delays in exploration and development activity in the emerging oil sector in Kenya, the tax is also a potential entry barrier for new investors, Africa Oil said.
The capital gains tax was charged from 1975 to 1985, when it was suspended to enable the property sector and the capital markets to grow. Introduction of the tax was mean to broaden the tax base and raise revenues for the government. While it is estimated only about Ksh.7 billion is projected to be raised from the tax, Kenya loses hundreds of billions of shillings every year to corruption, resource wastage and tax evasion annually. Analysts reckon that even as the government moves to enact measures to widen the tax bracket, the government ought to implement measures stopping the loss of public money both at the national and county government levels. This would ensure that the countless tax measures put in place do not raise funds that would go to waste.
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