Here is a sure way to net more taxpayers to plug revenue shortfall

The major problem with Kenyan tax system is that its base is very narrow. It is important that the tax base is expanded to bring more people into the tax net.

One such avenue for achieving this is to reintroduce the capital gains tax legislation. This has been long overdue, as the Government has lost significant amounts of potential revenue given the property boom that has been experienced in recent years.

Furthermore, Capital Gains Tax is sure to give rise to a more equitable tax system by getting the wealthier members of our society to also make a contribution towards our national development agenda.

Capital Gains Tax was first introduced in Kenya in 1975. Although it was suspended in 1985, the legislation was retained and still forms part of the Income Tax Act. Efforts to revive it were made in 2006 and 2011 but on both occasions Parliament scuttled the move.

It is therefore no wonder that Henry Rotich, Cabinet Secretary for the National Treasury, when presenting the Budget Statement for fiscal year 2013/2014 on June13, 2013 did not take the bold step of announcing the immediate reintroduction of the tax.

Instead, he merely stated that the Government had initiated a review of the Capital Gains Tax law under the Income Tax Act with a view to formulating modalities for its effective enforcement. Sadly, he did not even indicate how long the review would take and when he expects to have the law in place.

Simply put, Capital Gains Tax is the tax levied on profit or gain made on the transfer of qualifying property or assets. The tax is chargeable on both individuals and companies.

The still suspended Capital Gains Tax legislation under the Income Tax Act defines property liable to the tax in the case of companies to include, among other things, money, goods, choses in action, land and every description of property, whether moveable or immovable.

However, for individuals, property liable to the tax is said to comprise of land situated in Kenya as well as any right or interest in or over that land.

The term transfer of property has a special meaning for capital gains tax purposes. There is a transfer, for instance, where the property is sold, exchanged or conveyed; or on the occasion of loss or extinction of property; or on the abandonment, surrender or forfeiture or expiration of all rights to property.

It is important to note that certain transactions involving property dealings do not constitute a transfer for capital gains tax purposes.

These include transfer of property for the purpose only of securing a debt or a loan; the issuance by a company of its own shares or debentures and the vesting in the personal representative of a deceased person by operation of law of property of that deceased person.

One of the main weaknesses of the suspended capital gains tax legislation is that it does not draw a distinction between gains arising due to normal capital appreciation in the value of property and gains due to inflation.

In the process the legislation taxes both instead of restricting itself to gains due to natural accretion in value of the property in question. It is thus hoped that the review of capital gains tax legislation will introduce a mechanism for quantifying gains caused by inflationary pressures and excluding them from the capital gain to be subjected to the tax.

Our neighbor, Uganda, has capital gains tax legislation in place and applies the concept of a cost base to arrive at the adjusted cost of the property being transferred as a means to exclude gains due to inflation and only tax genuine capital gains.

Similar provisions, usually referred to as indexation, are applied in other parts of the world where capital gains tax is effective. 

The Cabinet Secretary for the National Treasury should immediately take bold step of announcing the reintroduction of the capital gains tax legislation when he presents his Budget Statement for fiscal year 2014/2015.

— Maurice is a tax director at Deloitte East Africa