The National Treasury yesterday beat an embarrassing retreat over plans to reintroduce capital gains tax regime and instead suggested wider consultations.
Economic Secretary Dr Geoffrey Mwau
The move will cost the Treasury critical funds to bridge the Sh330 billion deficit, meaning tax reforms originally outlined in the Budget unveiled a fortnight ago will have to look elsewhere to raise tax revenue.
The climb-down was informed by Treasury’s bid to reverse major losses suffered by the country’s emerging stock market and the currency market that has been under pressure since Cabinet Secretary Henry Rotich proposed to reintroduce the tax in his Budget speech.
Rotich’s tax measure targets capital gains to finance the Government’s ballooning expenditure.
“The Government has initiated a review of the Capital gains tax under the Income Tax Act with a view to formulating modalities for its effective enforcement. This will allow wealthier members of our society to also make a token contribution toward our national development agenda,” Rotich had explained in his Budget Speech.
However, the remarks immediately sent shock waves in the equity and forex markets scaring off investors.
Strategic partner
Economic Secretary Geoffrey Mwau, however, clarified that the Government has no intentions of immediately implementing the proposed tax.
Dr Mwau instead said that the Government would consult widely with the stakeholders to figure out the modalities of its implementation.
“That was a statement of intention we have not even worked out to know how this tax would be implemented. It will be too early to start thinking that you will be taxed,” Mwau told reporters, adding that the Budget for the next financial year (2013/2014) is fully financed.
“Now we are going to look at modalities and also consult widely,” he said. Dr Mwau indicated that progress on the possibilities of implementing CGT in Kenya would be known in the next six months.
Tax experts reckon that the process of coming up with CGT should be consultative to incorporate the views of all stakeholders. By yesterday, the shilling had marginally lost 0.5 per cent of its value to stand at Sh85.74 against the US dollar compared to exchange rate of Sh85.35 at the Budget Day (June 13), according to data from Central Bank. Similarly the Nairobi Securities Exchange (NSE) 20-Share Index fell three per cent to 4713.39 Thursday, down from 4,838 in the Budget Day.
A capital gain – or capital loss – is the difference between what it cost you to get an asset and what you received when you disposed of it.
You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT).
If you make a capital loss, you cannot claim it against income but you can use it to reduce a capital gain in the same income year.
If your capital losses exceed your capital gains or you make a capital loss in an income year you don’t have a capital gain, you can generally carry the loss forward and deduct it against capital gains in future years.
Therefore, selling assets such as real estate or shares is the most common way you make a capital gain or capital loss. CGT also applies to intangible assets such as business goodwill. “We hope that the process to come up with CGT legislation will be consultative in order to incorporate the views of relevant stakeholders,” said Steve Okello, Head of tax at PricewaterhouseCoopers (PwC) Consultancy firm. According to PwC, the tax, which is imposed on real estate, marketable securities and other saleable assets, is likely to have an impact on all sectors of the economy.
“However the major impact is likely to be felt in the property and financial markets if the exemption on marketable securities such as shares is not retained,” said Okello.
Indirect taxes
“The construction and property markets are currently growing at a rapid pace and hence a major contributor to economic growth.”
Capital gains tax was suspended in Kenya in 1985 but all countries in East Africa and many countries in the world still tax wealth through capital gains tax. “There is absolutely no justification why Kenya continues to suspend capital gains tax, while tax the poor people through value added tax and other indirect taxes,” said Michael Mburugu, Tax Director at PKF Taxation Services Ltd.
“To meet the expected financing deficit, the government should take a bold move and re-introduce capital gains tax to ensure that every citizen contributes to the national kitty through taxes.” PKF warns that re-introduction of the CGT should be well thought out to avoid stifling the real estate sector and economic development.
“CGT should not stifle home ownerships. A homeowner should be able to sell first home without CGT,” said Mburugu adding that: “There should be a threshold period of time for application of CGT and need to consult widely before re-introducing CGT.”
CGT is expected to yield tax revenues as well as introduce equality in taxation. Treasury is exploring new sources of revenues to help finance an ambitious Sh1.64 trillion spending plan for the 2013/2014 fiscal year.
According to the Budget statement, total revenue estimates for the fiscal year 2013/14 stands at Sh1.02 trillion, comprising of Sh961.3 billion of ordinary revenue, and Sh67 billion of appropriations-in aid.
The Gross recurrent and development expenditures for the National Government during the 2013/2014 fiscal year are estimated at Sh955.5 billion and Sh447.9 billion respectively.
By James Anyanzwa, The Standard
