Massive investments slump expected as 15 per cent Capital Gain Tax takes effect in January 1, 2023

Kenya’s competitiveness as a preferred economic hub and investment destination is expected to suffer a major setback amid palpable risk of massive investors’ flight as the Finance Act of 2022 (Finance Act) that amended the Income Tax Act (ITA) increasing the Capital Gains Tax (CGT) rate from 5 per cent to 15 per cent takes effect beginning January 1, 2023, The Informer can reveal.

Real estate dealers, property owners, developers and investors will henceforth pay higher tax charges upon the sale of properties by 200 per cent increase or a threefold increment.

The CGT is tax imposed on gains accrued from the transfer of property buildings, land or shares in Kenya acquired on or after January 2015.

However, property transfer for the purpose of securing a loan, transfer of assets between spouses, transfer by a creditor for the purpose only of returning property used as security for a debt or a loan, and transfer of shares listed on the Nairobi Securities Exchange (NSE) are exempt from CGT.

“Considering the high level of inflation in the country and the delicate economy recovering from effects of Covid-19 pandemic, this increment is not only punitive, but undesirable and untimely as well. We are trying to revive the economy through Public Private Partnerships (PPP) and Foreign Direct Investments (FDI’s) and this will make Kenya an unattractive investment destination.”

“This will also inform serious negative impact on mergers, acquisitions and investments in the construction industry.” An official from a private sector body who did not want to be quoted challenging the government policy observed.

The National Treasury successfully increased the CGT to boost revenue collections by the Kenya Revenue Authority (KRA) which has been given a higher target in the Financial Year 2022/23.

President William Ruto has set his first budget at Sh3.64 trillion giving the taxman a higher target as he seeks to build his economic legacy that promises to create jobs for the poor millions.

However, most of his administration’s spending, which will begin next July, will be on programmes aimed at economic recovery.

This is the second time the proposed increase has been made after the first attempt in 2019, when Treasury had sought to increase the tax rate to 12 percent.

The move was however, again, been opposed by investors and developers.

They have asked the government, in the second attempt, to retain the CGT at the current rate, as the proposed increase translates to a 200 per cent or a threefold increase.

Sector players say this is a drastic increase in less than one year, as the clause becomes active on January 1, 2023.

Comparatively, other East African states have higher CGT rates than Kenya.

For example, while Kenya’s CGT rate for residents stands at 5 per cent, in Uganda and Tanzania, CGT rate for residents is capped at 10 per cent respectively while Rwanda’s CGT rate stands at 30 per cent.

Just like many stakeholders, the National Assembly Departmental Committee on Finance and National Planning in their Finance Bill 2022 report vehemently opposed the National Treasury push and proposed that the CGT rate of 15 per cent be lowered to a rate of 10 per cent citing citing that Kenya is yet to adopt a mechanism to address inflation adjustment in the increased CGT high level of inflation.

However, the National Treasury push sailed through despite recommendations by the committee and stakeholders.