Thursday, December 1 2022

Economy

Companies seek capital gains tax relief in law as rate triples


Mucai Kunyiha, President of the Kenya Association of Manufacturers (KAM). FILE PHOTO | NMG

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Summary

  • The calls come following proposed changes to the Income Tax Act to increase capital gains tax (CGT) from 5% to 15% from January next year.
  • Indexation consists of adjusting upward the basic (initial) purchase price of a taxable good for tax purposes in order to reduce the inflationary distortion.
  • Tax experts argue that some of the capital gains are due to inflation, because the value of money declines over time and can be removed by adjusting the purchase price accordingly.

Manufacturing companies and tax experts renewed their calls for lawmakers to change the law to take inflation into account when calculating the capital gains tax (CGT) resulting from the sale of houses, land and shares held by individuals.

The calls come in the wake of proposed changes to the income tax law to raise capital gains tax (CGT) from 5% to 15% from January next year, increasing the must for anyone looking to sell a house or a three-fold lot.

“The proposal is punitive and will likely affect mergers and acquisitions and investment in the construction industry,” the Manufacturers Association of Kenya, which opposes the increase, wrote in a memorandum to the Assembly. national.

“The government should consider introducing an inflation adjustment (indexation) to arrive at the fair acquisition value of the property instead of increasing the CGT rate.”

Indexation consists of adjusting upward the basic (initial) purchase price of a taxable good for tax purposes in order to reduce the inflationary distortion.

Tax experts argue that some of the capital gains are due to inflation, because the value of money declines over time and can be removed by adjusting the purchase price accordingly.

“Now that we’ve had CGT for a while, maybe it’s time to start indexing because we’ve collected enough data over the last seven years. This is the way to go,” Philip Muema, a partner at Andersen Kenya, a tax and business advisory firm, said over the phone.

“But tripling that rate from 5% to 15% kills the real estate sector. It will make investing in our country more unpredictable, we will mess up our ease of doing business index and slow down the growth of the economy.

The debate over CGT’s inflation adjustment was heated when the country reintroduced the tax in 2014 after a 30-year suspension, but was shot down on the grounds that it would “complicate the process” of calculating the rate.

In the end, Kenya opted for a modest five percent rate on the net proceeds from the sale of assets like land and buildings, which was seen as simple and taking into account inflationary changes over the years.

By proposing to raise the tax and avoid indexation, Treasury Secretary Ukur Yatani gave the Kenya Revenue Authority a boost but disadvantaged property developers.

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