KRA’s plan to tax lucrative land transactions runs into headwinds

Kenya Revenue Authority (KRA) is unable to tax proceeds from the lucrative business of land dealing, raising fears that its target from capital gains on property could be missed.

A senior Ministry of Lands official told The Standard that new laws would be required to enable collection of taxes from land transactions.

Acting Director-General of Lands Peter Kahuho said his ministry was unable to enforce the capital gains tax (CGT) on land transaction as the available laws are only clear about payment of stamp duty.

“We have asked KRA to develop the framework but as it stands, CGT is not levied on land deals,” said Mr Kahuho last week.

KRA had set a target of Sh7 billion in the current year to be realised from levying taxes on capital gains on property and shares.

Kahuho’s confirmation could be a welcome relief for thousands of land sellers around the country as the property market has reported unprecedented growth since the turn of the millennium.

Some regions of the country have seen land prices rise by over 100 per cent in a single year, which could translate to significant taxes for the taxman. It was expected that sellers will pay 5 per cent of the gain in valuation of land as CGT upon closing of any transactions.

Buyers, however, have not been spared since they still have to pay stamp duty levied at either 2 or 4 per cent of the value of land, depending on whether the property in question is in urban or rural areas. Stamp duty is levied at 2 per cent on agricultural land, generally perceived to be property outside designated municipalities.

Faced with a much bigger revenue collection target, KRA has been struggling to expand the tax base beyond the easy target of income and consumption taxes, and taken several measures to involve the informal sector and businesses.

Stock market

But the CGT which was re-introduced last year, effective January 1, had run into headwinds especially on how the perceived gains would be assessed.

National Treasury, the parent ministry of KRA, had to review the guidelines relating to the stock market transactions and cut it down from 5 per cent of the gain to a uniform rate of 0.3 per cent of the transacted value.

In transactions relating to housing, assessing the gain was more straightforward and relies purely on the honesty of the seller in the assessment of profit at the point of disposal. Gains are calculated as the selling price less the cost of acquisition and expenses incurred in improvements.

The difficulty has, however, been in land-related transactions which National Treasury Cabinet Secretary Henry Rotich might have to review guidelines before land sellers begin to pay taxes.

But KRA had earlier in the year hoped to rope in land sellers by connecting land registries across the country with its online system called iTax. The agency said that stamp duty and capital gains tax on land deals would be paid through its online platform beginning March.

Property transfer

“We expect to significantly re-engineer the property transfer process and substantially cut down on the time and effort the public spends in undertaking property transfers,” KRA Commissioner General John Njiraini said. But that was, however, bound to fail from the start because nearly all land registries in the country are yet to be digitised while all transactions are still on paper.

Land buyers were expected to send a scanned copy of the transaction agreement entered with the seller, a copy of the title deed and sketch map to the property location.

Officials from KRA would then ask their colleagues at the Ministry of Lands to carry out valuation for purposes of calculating the stamp duty and capital gains tax.

KRA’s Deputy Commissioner Ezekiel Maru had promised to respond to our inquiries but had not done so by end of day yesterday.