By James Anyanzwa

The National Treasury Cabinet Secretary Henry Rotich plans to set in motion a process of re-introducing Capital Gains Tax (CGT) with a view of financing the Government’s ballooning expenditure.

“The Government has initiated a review of the Capital gains tax under the Income Tax Act with a view to formulating modalities for its effective enforcement. This will allow wealthier members of our society to also make a token contribution toward our national development agenda,” he said.

Tax experts however reckon that the process of coming up with CGT should be consultative to incorporate the views of all stakeholders.

“We hope that the process to come up with CGT legislation will be consultative in order to incorporate the views of relevant stakeholders,” said Steve Okello, Head of tax at PricewaterhouseCoopers (PwC) Consultancy firm.

According to Atul Shah, the chief executive of PKF Taxation Services Ltd, the middle class will not be affected much if the legal framework for the operationalisation of capital gains tax is designed well.

Capital gains tax

“There should be an appropriate threshold so that the middle class are not affected. This should look at the large corporates and oil transactions,” he said. According to PwC, the tax, which is imposed on real estate, marketable securities and other saleable assets is likely to have an impact on all sectors of the economy.

“However the major impact is likely to be felt in the property and financial markets if the exemption on marketable securities such as shares is not retained,” said Okello.

“The construction and property markets are currently growing at a rapid pace and hence a major contributor to economic growth.” Although the Capital gains tax was suspended in Kenya in 1985 all countries in East Africa and many countries in the world still tax wealth through capital gains tax.

“There is absolutely no justification why Kenya continues to suspend capital gains tax while tax the poor people through value added tax and other indirect taxes,” said Michael Mburugu, Tax Director at PKF Taxation Services Limited.

“To meet the expected financing deficit, the Government should take a bold move and re-introduce capital gains tax to ensure that every citizen contributes to the national kitty through taxes.”

Available figures indicate that Kenya Revenue Authority (KRA) will miss its 2012/13 revenue collection targets by an estimated Sh120 billion. Part of the blame for this underperformance is an outdated Income, Value Added and Customs and Excise Taxes system. PKF warns that re-introduction of the CGT should be well thought out to avoid stifling the real estate sector and economic development.

“CGT should not stifle home ownerships. A homeowner should be able to sell first home without CGT,” said Mburugu adding that,” There should be a threshold period of time for application of CGT and need to consult widely before re-introducing CGT.”

Rental earnings

CGT is expected to yield tax revenues as well as introduce equality in taxation. It is expected that with re-introduction of capital gains tax, the Government will be able to finance a growing budget deficit.

National Treasury is exploring new sources of revenues to help finance an ambitious Sh1.64 trillion spending plan for the 2013/2014 fiscal year.

Amongst other revenue generating areas being considered include taxing rental earnings by the landlords and enacting the Value Added Tax (VAT) bill with hopes of tapping Sh10 billion.

The National Treasury is also targeting grants, commercial loans and domestic borrowing to finance an overall fiscal deficit of Sh329.7 billion (7.9 per cent of GDP). According to the budget statement, total revenue estimates for the fiscal year 2013/14 stands at Sh1.02 trillion, comprising of Sh961.3 billion of ordinary revenue and Sh67 billion of appropriations-in aid. The Gross recurrent and development expenditures for the National Government during the 2013/2014 fiscal year are estimated at Sh955.5 billion and Sh447.9 billion, respectively.