Confusion reigns in stock market over Capital Gains Tax

In January trading, most investors shied away from trading at the NSE for fear of being hit by the tax [photo:BEVERLYNE MUSIKLI/standard]

The Kenya Revenue Authority (KRA) appears to have retreated from its earlier directive requiring stockbrokers to remit capital gains tax each time an investor disposes their shares at the Nairobi Securities Exchange (NSE).

In a notice appearing in the dailies on Friday, KRA has now confined the burden of paying Capital Gains Tax (CGT) to those dealing in transfer of land or buildings. “Taxpayers should note that it is mandatory to pay capital gains tax and stamp duty before transfer of land or building,” said the notice in part.

Interestingly, while KRA does not mention stockbrokers, also involved in the transfer of property in the form of shares, it is still sending signals about levying penalties on stockbrokers for failing to remit the January, 2015 capital gains tax dues.

In a letter dated February 25, 2015 and addressed to Chief Executive Officer, Kenya Association of Stock brokers & Investment Bankers (KASIB), KRA wants all stockbrokers to remit January CGT collections.

“The purpose of this letter is to bring to your attention and that of your members that CGT collected for the period between January 1, 2015 and January 31, was due and payable on or before February 20, 2015,” said Alice Owuor, Commissioner of Domestic Taxes department, in the letter.

“The managers and the domestic taxes department (DTD) stations where your members’ PINs (and tax files) are based have been instructed to provide the necessary support required for smooth implementation of CGT, and its collection at due dates.”

For reconciliation of payments, KRA wants stockbrokers to provide details of declarations and payments made so far for January 2015 transactions. Also, the taxman wants KASIB to provide information on sale transactions made between 1st—31st January on behalf of members’ clients.

Outstanding issues

Although KRA insists the tax is still in force, sources at the Capital Markets Authority (CMA) say the operationalisation of the tax will be delayed until appropriate changes to the law are effected. The source told Weekend Business that the taxman and National Treasury are among players working on suitable alterations with a view of avoiding discontentment from capital markets players.

In January, monthly turnover at the NSE hit the lowest level in two years, at Sh9.7 billion. However, February turnover rose to Sh16.1 billion. This spike happened when KRA suspended CGT on transactions at the Nairobi bourse.

A top official at CMA, who did not want to be quoted, confirmed that implementation of the law will be deferred to allow for more consultations with the industry stakeholders. “We are working with all the parties involved to refine the law and equally weigh options on when the new changes will be tabled in Parliament for discussion and approval,” the CMA official said.

This source said the capital market players are working on regulations to align the law with a new policy statement issued by the National Treasury Cabinet Secretary Henry Rotich.

Rotich, who is accompanying President Uhuru Kenyatta in Japan neither denied nor admitted, referred us to KRA boss John Njiraini.

The stockbrokers said since the meeting they had with the Government agencies last month, they have not received any official communication. “We still hold earlier claim that the new law is creating conflict in our stock business.  However, we are still consulting with KRA and Treasury,” said KASIB Chief Executive Officer Wilson Njoroge.

Further, he confirmed no member of his association has paid the tax to KRA until all outstanding issues are resolved.

Earlier, the brokers argued that their information systems were not robust enough to account for the tax. To calculate the tax, the brokers were to rely on the Central Depository and Settlement Corporation’s (CDSC) system to determine the acquisition prices of shares bought after 2005.

For shares bought between 2005 and 1998 they were to use the highest price recorded by specific stocks that year as found in the NSE records. Shares bought prior to 1998 were to be assumed to have been acquired at the highest price recorded in 1998.

Last month, stockbrokers threatened to boycott trading at the NSE protesting the introduction of CGT. This sent the market into panic prompting CMA to convene an urgent meeting with stockbrokers and KRA where an ‘undisclosed deal’ was reached.

Rotich recently said the Government will shift the burden of paying and accounting for capital gains tax to investors at the NSE.