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KRA's battle to collect taxes from elusive landlords continues

Real Estate
 The exercise to register property agents and map properties was mulled back in 2012. [iStockphoto]

Getting landlords to pay their fair share of taxes has proven to be an uphill task for the government, even as the National Treasury reveals yet another adjustment to the existing levying system.

The 2024 Budget Policy Statement that informs the 2024/25 budget cites revenue shortfalls as the reason behind the proposed changes.

And despite such changes being instituted over the years by former Cabinet Secretaries (CSs), it seems the government’s tax net has gaping holes that end up causing revenue shortfalls at the end of every financial year.

Even increasing the maximum threshold to Sh15 million from Sh10 million as documented in the Finance Act in 2020 to broaden the net for landlords does not seem to bore the finest of fruits.

National Treasury Cabinet Secretary Prof Njuguna Ndung’u in the 2024 Budget Policy Statement (BPS) proposes to review the residential rental income tax regime to ensure fairness and improve tax collection.

The current regime has that those landlords who earn within a threshold of Sh288,000 and Sh15 million are taxed at a simplified rate of 7.5 per cent of the gross income but with an option of paying at the corporate tax rate.

“The simplification was introduced to enhance compliance. Though it has increased the number of taxpayers, it has not achieved the envisaged compliance with an estimated gap of Sh27 billion in the year 2022,” reads the BPS statement.

“To address compliance challenges in rental income taxation, the government will enhance registration of property agents, mapping of properties and leveraging on technology. In this regard, and to ensure fairness and equity, the government will review taxation of residential rental income.”

The exercise to register property agents, and map properties was becoming aggressive in 2022, even though it was mulled back in 2012.

In October 2022, KRA issued a notice that it has commenced the exercise in the Nairobi metropolitan area with the agency banking on tenants to share information about their landlords and how much they pay for rent.

“Members of the public are requested to cooperate and provide the information required during the exercise,” read the notice dated October 18, 2022.

It then becomes the burden of tenants to tell on their landlords.

“Tenants are urged to co-operate with KRA officers lest they are found liable for offences under the current tax laws. Issuing false or misleading statements, refusing to give any required information or obstructing the KRA in the performance of its duties can attract a fine of up to Sh1 million or imprisonment for a term not exceeding three years, or both,” reads a breakdown of the Finance Act 2022 by Kieti Law LLP.

A look back at the 2015/16 Budget Statement prepared by then National Treasury CS Henry Rotich noted how the residential and rental business have witnessed a boom, which informed his decision to simplify how to get a pound of flesh from owners of these businesses.

“On the contrary, rental income from the same has not grown commensurately. I propose to simplify the taxation regime for landlords owning residential property by taxing their gross rental income at 12 per cent for gross rental income below Sh10 million per year,” he said.

That year, CS Rotich proposed a tax amnesty for landlords who had not fully declared rent or were outside the tax net.

“In this respect, the landlords with tax arrears are advised to prepare to engage the Kenya Revenue Authority (KRA) to clean their tax records,” he said.

Proposed measures

The following year, during the presentation of the 2016/17 Budget Statement, CS Rotich further proposed measures to enhance compliance among landlords referencing the previous year’s simplified tax regime.

“I propose to gazette rules to facilitate in the implementation of this law, introduce a minimum taxable rent income of Sh12,000 per month and empower the Commissioner to appoint withholding tax agents for rental taxation. These measures are meant to encourage landlords to make a full and true declaration of their rental income,” he said.

Following the tax amnesty announced by CS Rotich, the Kenya Revenue Authority (KRA) unveiled a countrywide campaign in September 2015 to induct 20,000 landlords into the tax bracket.

Then KRA Commissioner General John Njiraini noted that the real estate sector had grown by 7.2 per cent between 2008 and 2014, a key indicator that landlords were smiling to the bank.

From the Finance Act of 2015, this amnesty, which was on principal taxes, penalties and interests, however, came with a catch. Landlords had to file returns for the two previous years (2014 and 2015) to get the 100 per cent amnesty.

In the Budget Statement 2022/23 and consequently Finance Act 2022, more pressure was piled on landlords. Kieti Law LLP explains that KRA was empowered to issue notices to the land registrar to hold a taxpayer’s property as security for unpaid rental income tax.

The property can later be disposed of if the taxpayer fails to settle their liability within two months.

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