Nothing can be more unfair than retroactive taxation by the State

Two years ago, the government reintroduced the Capital Gains Tax (CGT), after its suspension in 1985. Since it commenced implementation, the vibrancy in the property market has translated to major fiscal benefits for the taxman and the KRA tax collectors who I understand are paid on commission basis.

For those not in the know, the CGT is a tax on the enhanced value of property from the date of purchase to the point of resale. It is not unique to Kenya and I am aware that Tanzania and Uganda, whose property markets are less dynamic than Kenya’s, have implemented the CGT regime for a while.

In principle, it is a reasonable tax especially in a country like Kenya where the market is vibrant and property values have exploded without a corresponding benefit to government, which is usually the catalyst causing the property value explosion.

This dynamism of the property market, however, demands very thoughtful application of such a law if it is not to prejudice growth in a critical sector. Unfortunately, it is clear from the significant challenges that the implementation of the Act is facing that it was not well thought through beyond its potential for revenue collection. These challenges have caused severe inconvenience for property owners and is quietly depressing the property market in a manner that could seriously harm the economy.

The first problem, which fortunately has been cured by an order obtained from the High Court by the Law Society of Kenya (LSK), related to the point of payment of the tax.

Until that part of the law was deemed unconstitutional by the High Court, KRA required sellers of property to pay CGT at the time of payment of stamp duty, which in many cases, particularly where a buyer is being financed, was long before receipt of the purchase monies by a seller. For some bizarre reason, the taxman expected a seller to source funds from other sources to fulfill his tax obligations whether or not he had been paid the monies on which the tax was being demanded!

The court correctly found that the tax is only payable once a seller has received the purchase price. We look forward to the KRA adjusting its systems to ensure compliance with the court order. Another major challenge relates to the applicable period for calculating the capital gain. Whilst the law was passed in 2014 and started operating in 2015, it defines the applicable date for enhanced value determination as the date of purchase of the property even if it is before 2014.

Consequently, even if one bought the property 50 years ago, the tax is calculated on the basis of the price paid 50 years ago against its price today. How unreasonable can this be! Never mind that the tax was not applicable at the time of purchase. Nothing can be more unfair than retroactive taxation.

Even worse for many sellers, while the tax allows one to deduct from the enhanced value the cost of their improvements made on the property, this is impossible. Most people do not keep records of such improvements, not knowing that those records would have such an effect on their bottom line!

This requirement must be adjusted to either apply the gain from 2014 or place a cap on the period in which the enhanced value is calculated.

Another challenge with law applies in the common practice in Kenya where people buy complete units of land, subdivide and sell.

In those circumstances where one is selling only a portion of property, what is the tax to be based on? In the absence of clarity on this and many other points, sellers and buyers are left at the mercy of bureaucrats whose response to a difficult problem is inaction.

While many have complained about these challenges, the KRA, harvesting the benefits of the tax, has generally played deaf forcing people to seek court intervention on basic issues. We want to see the historically reasonable Njiraini giving this matter more attention even as he works hard to reach the revenue target placed on him in this year’s budget.

The writer is an advocate of the High Court of Kenya