KRA loses capital gains tax battle with banks

The Court of Appeal has put brakes on Kenya Revenue Authority’s (KRA) quest to charge banks capital gains tax on land auctioned to recover unpaid debts.

Appeal court judges William Ouko, Hannah Okwengu and Fatuma Sichale dismissed KRA’s appeal against the Kenya Bankers Association’s position that the tax amounted to double taxation as they are also required to pay stamp duty.

The judges also faulted KRA for not involving banks while re-introducing the tax.

Capital gains tax (CGT) was suspended in 1985 only to be re-introduced in the Finance Act, 2014, with the effective date being January 1, 2015.

It imposes a five per cent tax on gains made from the transfer of property including land, buildings and investment shares.

“The respondents (banks) herein were not given an opportunity to present their points of view concerning this move by the appellant. The unilateral decision to demand that the respondents’ members collect CGT from its various borrowers by twinning the payment of CGT and stamp duty was clearly unfair and irregular,” the judges ruled.

KRA had lost the CGT battle before the High Court. Justice George Odunga found that it was unfair to tax an asset sold to recover bad debt as the bank’s interest in the sale is not to make profit but to recoup its money.

The judge, however, allowed KRA to tax any surplus money yielded from auctions. 

KRA lodged an appeal arguing the judge erred by failing to find that a bank has a proprietary interest in any property it holds as security to a loan issued to a borrower.

According to the taxman, a borrower has no role in auctioning the property, hence cannot be taxed for the sale. Instead, KRA argued, it is for the banks to calculate CGT and remit the same once the auction happens.

“Valuations are carried out before the lending in order to establish the forced sale value of a property, hence a calculation of the CGT is not an impossibility on the part of a chargee (banks),” KRA lawyers argued. 

KBA on the other hand argued that a borrower remains the owner of a property used as a security until the same changes hands