Will new KRA system bring more landlords into the tax net?

Rental houses in Pipeline Estate in Nairobi's Embakasi area. A majority of tenants do not have tenancy agreements with their landlords. [File, Standard] It is still unclear how the government plans to collect Sh86 billion more from landlords, even as it unveiled a new digital tax system targeting the segment. The lack of data on the number of landlords and rental properties in the country has been cited as a major hindrance to bringing them into the tax net. The Kenya Revenue Authority (KRA) collected Sh14.4 billion from rental income tax in the financial year 2023-2024. This is a year-on-year growth of 5.2 per cent compared to the Sh13.6 billion collected in the 2022-2023 financial year and Sh12.3 billion in 2021-2022. National Treasury Principal Secretary Chris Kiptoo pointed out that the newly introduced system, Electronic Rental Income Tax System (eRITS), will improve collections. "With this system, we aim to not only increase revenue collection but also create a more equitable and predictable tax environment that benefits both taxpayers and the government," said Dr Kiptoo. Joachim Ombui, the chairperson of the Landlords and Tenants Association of Kenya (LATAK), cited the lack of data on landlords and rental properties for low revenue collections. "That is the reason they do not collect enough money," he said in an interview. "Right now, the government cannot tell you how many landlords we have in the country and how much it is supposed to collect. That is a failure on its part." He said KRA needs to consult players in the rental property sector in mapping out rental properties. "Let us identify the formula for data collection and do a survey on residential and business premises," he said. Mr Ombui noted that the lack of such data is the reason why attempts by the Nairobi City County government to increase rates have been fought off by landlords, as there is no clear formula for how these numbers come to be. According to National Treasury and Economic Planning Cabinet Secretary John Mbadi, there are enough landlords in the country to raise Sh100 billion annually, but we are only collecting Sh17 billion," said the CS during the 2024 KRA Tax Summit. "Many of us here own property, and we know the scope, but we are not paying rental income tax, which is 7.5 per cent." The Kenya Kwanza administration cut the rate to 10 per cent as a way of incentivising landlords to comply. The question of the number of landlords in the country was also raised by the Centre for Affordable Housing Finance (CAHF) in a 2023 data set prepared by 71point4, a consulting firm. The think tank noted that almost 90 per cent of rental houses delivered in the urban centres are from private individuals. It highlights that between 2009 and 2019, the housing market in the country witnessed 158,000 new urban renter households compared to 39,000 owner-occupied. But what makes it challenging for KRA to rope in more landlords into the tax bracket is that a majority of them devise ways of evading detection by authorities. This is especially rampant in the informal settlements and some areas built with durable or non-durable materials. These segments cover 56.0 per cent of the rental market, including private individuals, likely live-in landlords with similar socio-economic backgrounds as the tenants. According to CAHF, there are 174,700 landlords nationally. "Survey data on landlords appears unreliable. How do we improve it? How do we address the underlying incentives that make landlords invisible?" posed CAHF in the Housing Data Landscape in Kenya 2023 document. The government, through the National Treasury and KRA, has made several attempts to bring landlords into the tax bracket. A major one was in 2022 when KRA earmarked Nairobi City County for data collection on rental property between October 19,2022 and November 11, 2022. Areas of Kilimani, Kileleshwa, Upper Savannah, Kasarani, Eastleigh, Ngara and Pangani were among those on the radar of the taxman. The mapping exercise had been informed by Finance Act, 2022, which allowed KRA to seize property of a taxpayer who is not compliant to pay their dues. KRA, during the data collection exercise, urged tenants to cooperate with the agents on the grounds, with subtle threats of consequences if wrong information is issued. A fine of Sh1 million or a prison term not exceeding three years was the consequence. Back then, the question of data protection was a concern. "Details such as the names and location data of landlords would constitute personal data. Other details that may be collected, such as the landlord's property details, would constitute a special category of personal data known as sensitive personal data," explained Cliffe Dekker Hofmeyr, a law firm, in its Tax and Exchange Control Alert for October 2022. Before the data collection exercise, KRA depended on other agencies such as Kenya Power, using electricity metre numbers to pinpoint the exact location of homes. Additionally, if one bought numerous electricity meters, it pointed to the possibility of putting up rental units. The Kenya Housing Survey Basic Report 2023-2024 provides an insight into the rental property market, showing that a majority of tenants live without any formal agreement with their landlords. Such a gap in the rental property market also influences how accurate whatever data the government may have on the number of landlords is. As such, KRA may not know exactly how much these landlords make in rental income. According to the report by the Kenya National Bureau of Statistics (KNBS) published in January of this year, 71.8 per cent of tenants have no tenancy agreement with their landlords. The report says rent agreements are vital in fostering a transparent, fair, and legally protected relationship between landlords and tenants. "The most basic purpose of the rent agreement is to outline the terms of the lease, including the monthly rent, maintenance and repairs of the house, security deposit on the rental, when the rent is due, among others," reads the report. The report shows the situation on tenancy agreements is dire in the counties of Mandera, Murang'a, Samburu, Elgeyo Marakwet, Narok, Bungoma, Kilifi, Tana River, and Siaya, where less than 10 per cent of tenants have such documentation. "The counties of Kajiado (69.4 per cent), Taita Taveta (50.2 per cent), and Nairobi City (40.5 per cent) had the highest proportion of tenants with written rent agreements. Conversely, none of the households in Mandera County had a written rent agreement," the report says. It shows 21.2 per cent of homeowners with a second unit are renting it out for extra income. One way of getting this data could be from financial institutions, as the report shows how significant microfinance banks are in supporting the construction of property for rent. For example, of the loans issued in 2023, 18.4 per cent were towards the acquisition of rental property; 6.3 per cent for purchase, and 12.1 per cent towards the construction of the same. "The primary housing finance products for commercial banks are mortgage finance at 86.1 per cent, for MFBs (microfinance banks), construction finance for rental units is the primary product at 53.8 per cent while for the Saccos, it is land acquisition at 60.8 per cent," reads the report.

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