Uhuru’s new tax proposals signal rise in property prices(2011-06-21)
Treasury’s new measures to plug loopholes that property dealers use to avoid paying taxes are expected to add impetus to real estate price inflation, as agents pass on the additional levies to home buyers. The new measures contained in Finance minister Uhuru Kenyatta’s Budget proposals require real estate developers and land dealers to pay taxes on gains made from the appreciation in the value of properties sold. Kenya Revenue Authority (KRA) has since issued a directive asking dealers in immovable property to pay taxes on capital gains made in their transactions. The directive states that the sale of immovable property will be considered as business income — where it is identified as a core activity in the company’s memorandum and articles of associations, where acquisition was with the aim of disposing it thereafter for a profit, where property transactions are recurrent and where property was acquired with aim of developing and selling it thereafter.” Real estate agents and land brokers currently do not pay taxes on valuation increases during property sales, as capital gains are not taxable in Kenya. Property owners are required to pay stamp duty of four per cent on transfer of urban properties and two per cent for rural properties. Business income tax is set at 30 per cent. “The tax will adversely hit the real estate and housing development industry since any extra taxation will be passed onto land and house buyers,” said Abrahim Mwathane a Nairobi- based land surveyor. “In a market where land and houses prices are already regarded as high and out of reach for many Kenyans, this measure will make it harder for more Kenyans to purchase land or houses.” Mr John Njiraini, the commissioner of domestic taxes in the large taxpayers’ office, said the taxman’s move was a “clarification” and not a change in the law. “We are not bringing back capital gains tax as such but we are clarifying that if your business is transacting in properties, then you ought to pay tax here. Capital gains tax remains suspended,” said Mr Njiraini. Capital gains taxes were suspended in 1985, when it was viewed as a hindrance to investment and mobility of capital. In 2006, the then Finance minister, Mr Amos Kimunya attempted to re-introduce the tax at a reduced rate of 10 per cent limited to land acquisitions, but the motion was rejected in Parliament during debate of the finance bill. Analysts said the government was “re-introducing” it on the basis that the suspension had served its purpose and unlocked the sector which has now attracted credit of over Sh100 billion from financial institutions. Those in favour of the tax noted that much of the rise in price was due to infrastructure developments going on in the area which is facilitated by use of public funds. The construction of Thika Highway has seen land along the 40 kilometre super-highway rise 50 per cent each year. Mr James Mworia, the managing director of Centum Investment, said the directive would not affect the sector’s vibrancy. He said the Finance minister had exempted real estate investment trusts and the sale of shares in such trusts from corporation and withholding tax, which will attract institutional investors to the sector. “This will attract investors who are not exposed to double taxation,” said Mr Mworia Ms Nelly Mbugua, the managing director of Citiscape Valuers and Estate Agents, said developers had sought audience with the commissioner of domestic taxes on Friday for clarifications on the new rules. “What we have been charged before is the stamp duty which was paid beforehand through the lands office,” she said. By expanding the definition of business income, the taxman appears to have overcome potential hurdles that would have come with trying to re-introduce capital gains tax through Parliament. While shooting down the motion in 2006, the MPs argued that capital gains tax would lead to a rise in rents as landlords transferred the cost to tenants. With the cost of living on an un-relenting climb, analysts said the same argument would have carried the day in the House this year. “They are not seeking a new law but issuing guidelines by defining business so they have avoided the hurdle of passing through Parliament for a capital gain tax. They are right as you can’t be conducting business and your revenues are not taxed,” said Mr Samuel Henia, a lawyer with John Mburu and Advocates. Social investment groups and Sacco movements have engaged in purchase of large tracts for sub-division and sale of plots before sharing the profits. Tax experts said such sub-division would be viewed as making the land suitable for sale and hence attract business tax. “Since there is no capital gains tax in Kenya, businesses and individuals may be entering into commercial deals on properties for some quick tax free profits,” said Rajesh Shah, PwC Tax partner. “KRA has therefore provided some guidelines whether all such gains should be treated for tax purposes as business income and not as capital gains”. And Mr Nikhil Hira, a tax partner at Deloitte and Touché, said: “Where you hold the property for long to enjoy enduring benefits then that is capital gain but if your business is to turn them over then that is business income.” However, some read mischief in the move by the authority seeing it as a back-door reintroduction of capital gains tax. Dr Alfred Omenya, a lecturer at University of Nairobi’s department of architecture and building science objected to any form of property tax. Courtesy: Business Daily