Scrapping of capital gains tax on share sale good for brokers

NAIROBI: The Finance Act 2014 introduced Capital Gains Tax (CGT), which took effect from January 1 this year.

According to the Act, stockbrokers who conduct the transfer of investment shares on behalf of a transferer were mandated to collect and remit tax to the Kenya Revenue Authority (KRA).

Investment shares are defined as shares of companies, municipal or Government authorities or a body created by those authorities, that are listed and traded on the Nairobi Stock Exchange.

The stockbrokers found the requirement to collect the tax and remit it to the KRA unworkable. They appealed to the High Court to remove them from this requirement.

One of the reasons for their objection was that the CGT legislation imposed tax on the gain arising from the transfer of investment shares. The gain to be taxed was to be the excess of the consideration over the adjusted cost of the shares transferred.

ADJUSTED COST

The stockbrokers argued it would be very difficult for them to determine the adjusted cost of the shares they transferred and wanted the burden of accounting for CGT transferred to the owners of the shares. The High Court ruled against the stockbrokers.

However, National Treasury Cabinet Secretary Henry Rotich, in his 2015-2016 Budget Statement delivered Thursday, introduced an amendment to the contentious issue.

Mr Rotich proposed to remove the 5 per cent tax on capital gains arising from the sale of shares and introduce a 0.3 per cent withholding tax on the transaction value of the shares.

Because the CS has not indicated whether the withholding tax will be final tax, one assumes this will be just an advance tax.

This means when share owners are filing their self-assessment returns for the affected years, they will compute the capital gain and apply the CGT rate of 5 per cent on such gains then claim credit for the withholding tax deducted at source by the stockbrokers.