NAIROBI: In the face of the ever growing budget, the National Treasury sought to raise additional revenue through the re-introduction of Capital Gains Tax. CGT were suspended in Kenya in 1985 to encourage investments in the property market as well as spur growth in the stock market.
After the 2014 Finance Act which was assented to by the President in September, the government re-introduced CGT at 5 per cent on gains realised from the transfer of property as well as gains from sale of shares in the stock market. The 5 per cent capital gain tax is considered much lower compared to that charged in neighbouring countries.
In Tanzania and Uganda CGT is charged at 30 per cent. The Eighth Schedule of the Income Tax Act appoints stock brokers as the collecting agents of capital gains tax on sale of shares.
But there is a challenge; stock brokers say they lack the legal capacity to withhold as well as the technical capacity to determine the amount payable due to the large volume of shares traded and imperfect information about the shares. For example, the time of purchase and the price especially because some shares are acquired through bonus and rights' issue.
Through their umbrella organisation, the Kenya Association of Stockbrokers and Investment Bankers, the stock brokers unsuccessfully sought legal redress at the High Court to review these bottlenecks and address fears that the CGT would ward off investors from the stock market.
They claimed there was a steady decline in trade with investors considering a move to alternative markets. The stock brokers have since moved to the Court of Appeal to appeal against the decision.
It remains to be seen on the next steps to be taken in the implementation of the CGT and its potential implications on the attractiveness of the real estate and the stock market to investors with stakeholders fearing that it would ward off investors from these sectors and reverse the gains made.
With the planned launch of the derivatives market at the Nairobi Securities Exchange, the reintroduction of CGT might lead to slow growth of the market as an alternative investment avenue by keeping away investors.
Capital Gains Tax coupled with brokerage fees which currently stands at 1.8 per cent to 2 per cent erode the profit margins of investors which would thus scare them into seeking alternative investment avenues at a time when the Government needs to support the development of Nairobi Securities Exchange's new segment.
The real estate sector in the country has grown tremendously over the past few years with more and more investors entering the market, attracted by huge profit margins in the sale of property in major towns across the country.
Consequently, property prices in major cities and towns across the country have gone through the roof beyond the reach of a majority of Kenyans.
The real estate sector therefore provides an attractive avenue for the Government to collect additional revenue to plug the budget deficit. This may, however, have detrimental effects to individuals seeking to purchase properties in the country because the CGT could be passed on to them in the form of higher prices as the sellers cushion their profit margins.
The reintroduction of CGT, in my opinion, holds mixed fortunes for the country. On the positive side, the Government will raise additional revenue, on the other side, it could result in reduced activity in the Nairobi Securities Exchange as well as push up the already high property prices.
To address this, the government ought to involve all stakeholders while implementing CGT and at the same time, educate and sensitise investors on CGT.
