Rental income revenue can do better if more landlords pay tax

The population of urban dwellers in Kenya, just like in many parts of the world, has continued to rise steadily over the years. Data by worldometers (2019) shows that about 6.2 million people lived in Kenyan urban settings in 2000. 

This was 19.8 per cent of the entire population. Worldometers states that currently, 14 million Kenyans live in the urban regions - 27.1 per cent of the total population. The rapid increase in urban population is largely one of the factors that have led to an exponential growth in the real estate sector with a bias to rental residential premises.

This position is corroborated by the many upcoming residential premises in the outskirts of major urban settings. Without doubt, investment in the real estate sector, just like most sectors of the economy, generates substantial taxable income. The vibrant growth witnessed in the real estate sector does not directly translate to the amount of tax collected from the sector.

The Government has put in place tax legislation to support revenue collection from the sector. For quite some time, investors in rental, commercial and residential premises were required to remit taxes and file corresponding tax returns annually.

The Government later separated premises and introduced a simplified tax regime for residential rental premises through the Finance Act 2015. The regime, known as Monthly Rental Income (MRI) tax, came into effect on 1st January 2016.

Under this regime, investors in residential properties are required to remit 10 per cent of the gross rent collected to the Kenya Revenue Authority (KRA) on a monthly basis. It is important to note that MRI tax is due on or before the 20th day of the month following the month the rent was received.

Just like any other tax obligation, the legislation that administers MRI tax, Income Tax Act Cap 470 Section 6A, imposes a penalty of Sh20,000 or a five per cent of the principal tax due on defaulters. The higher of either penalty supersedes. Within the six months of the 2015-16 when MRI was effected, KRA recruited close to 30,000 landlords.

Subsequent recruitments have continued to bring on board more landlords. In the next three financial years ending 2020/2021, KRA projects to recruit more than 66,000 landlords. Recruitment of more landlords is one of the tax-base expansion initiatives that KRA is banking on to enhance revenue collection.

For this to succeed, there is a need for more landlords to voluntarily come on board and enroll for monthly rental income. By so doing, the revenue collected will go a long way in enabling the government meet its objectives of making lives better for all Kenyans. When enough revenue is collected, the country will not need to borrow to sustain itself.

 Judith Njagi is the KRA Taxpayer Services Chief Manager