Stockbrokers sue State over capital gains tax

Attorney General Githu Muigai

Stockbrokers have moved to court to challenge the implementation of the new capital tax law.

The brokers, in a suit filed under a certificate of urgency through Kenya Association of Stock Brokers, claim that the re-introduction of the new capital gains tax (CGT) demanded from investors is unrealistic and will lead to paying taxes twice.

The association through lawyer Kiragu Kimani says having CGT after a three-decade freeze has brought uncertainty on how to deal with taxes accrued after sale of shares and thus creating a difficult scenario for both the stock brokers and investors.

"The Finance Act introduced a new rate of taxing capital gains without repealing the previous rate. The Kenyan taxpayers now run the risk of being subjected to two different rates of taxation for the same tax. I verily believe that the growth of the Nairobi Security Exchange has been attributed to the suspension of Capital Gains Taxes," Kimani said.

He argued that relying on the eighth schedule, drafted in the 1970s, has resulted in laws that cannot be enforced in securities exchange today.

Kimani said trade volumes at the Nairobi Securities Exchange (NSE) have dropped by more than 70 per cent since the re-introduction of CGT this year, adding no other factors would have been attributed to the decline in trade in the market other than the new law.

The law now introduced in the Finance Act 2014 had been suspended in 1985 to encourage sales of securities and investment in the real estate sector. The brokers argue that there is conflict in law that in one section requires stockbrokers to deduct capital gains tax at the rate of 7.5 per cent, and says the dealers should retain five per cent of investor's net gains from share sales in another.

Income tax filing

The stockbrokers argue that it is unclear whether CGT is a final tax, meaning that it ought to be remitted at the end of each transaction, or it is regular tax which is supposed to be assessed by the tax payer and paid at the end of the year along with personal income tax filing. In the case where Attorney General Githu Muigai and Kenya Revenue Authority are respondents, the stockbrokers argue that they were never consulted as Parliament was enacting the law.

"By introducing CGT and not affording the members any say on its introduction, the National Assembly enacted the Finance Act in a manner that is lacking openness and accountability,'' The association's CEO Wilson Njoroge said in his affidavit.

He said the new tax regime has introduced paper work that would draw NSE back in terms of development as it has automated its transactions.