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New rental income tax is killing our investments, developers tell KRA

By Lee Mwiti | February 6th 2017
Kenya Private Developers Association (KPDA) chairman Mucai Kunyiha. (Photo: Courtesy)

Property developers have termed withholding tax on rental income that became effective on January 1 an affront to the sector.

Under the aegis of the Kenya Private Developers Association (KPDA), they said the new tax regime is a blatant negation of previous Government attempts to offer incentives to players in the real estate sector.

In an interview with The Standard, KPDA Chairman Mucai Kunyiha said developers are usually given incentives in form of capital allowances and tax deductions as they develop properties, but with the withholding tax legislation, such incentives will now be “useless”.

“We have had a meeting with the Kenya Revenue Authority (KRA) and we are yet to agree how this tax scheme will work since it undermines the incentives that the Government has given us. For example, KRA says the tax is to be withheld on the gross rent. We usually have a service charge in the gross rent, which clearly should not be taxed, but now it will also be taxed, which is wrong,” said Mr Kunyiha.

He said during property development, developers also suffer high financing costs because they usually have to take loans from financiers at high interest rates. Mr Kunyiha said developers will now be unable to reap good returns, with most of their earnings going to loan repayments.

“Few developers get returns of 30 per cent from their investments since many are repaying loans. The 10 per cent that is being withheld as tax is too high to encourage developers to keep investing in the real estate sector,” he said.

KRA has, however, sought to justify the new tax regime, saying a number of developers over the years have been avoiding paying tax, an assertion KPDA disputes. Under the new law, residential rental income tax will be paid at a flat rate of 10 per cent of gross rent received.

But Mr Kunyiha said the law is ambiguous since it does not clearly say who is to withhold the tax.

Hass Consult Head of Research and Marketing Sakina Hassanali has backed the new law, saying it does not affect landlords who are tax-compliant.

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