Fears of higher rents amongst Kenyans over capital gains tax return

NAIROBI, KENYA: Tenants have been asked to brace for higher rents after the reintroduction of capital gains tax on the real estate sector through the Finance Act 2014.

Tax experts believe landlords will pass the new 5 per cent tax to their tenants as they try to protect their margins.

"There is possibility that might happen...they will try to pass it to the tenants," Parag Shah, a partner at accounting and tax firm Grant Thornton said in an interview Wednesday.

President Uhuru Kenyatta signed into law the Finance Bill 2014 last week paving the way for the re-launch of the capital gains tax that was suspended 36 years ago. In most countries, the tax is payable each time a person sells something and makes money.

It is feared the new tax will hit investments in the real estate, mining industry and the stock market. The new law takes effect from January 1 and is aimed to help the Government seal part of a gaping hole in its Sh1.8 trillion budget. The Government hopes to rise more than Sh8 billion from the capital gains tax.

Wednesday, it emerged that the new law is not clear on how it will impact on the trading of shares at the stock exchange with tax experts at Grant Thornton asking the National Treasury to come clean on the issue to clear confusion in the industry.

"There is still no clarity on whether it affects listed securities or not... it's not mentioned anywhere in the Finance Act," said Shah. "This has created a hype in the market... it would be good if it is clarified."

Nevertheless, there is general consensus that investors will be willing to comply with the new tax, terming it considerate compared to a country like South Africa where the rate is a 40 per cent or even Uganda where the tax is 20 per cent.

"I think the five per cent is a very fair rate and people will comply with this tax," said Linsey Adhiambo, a senior manager – advisory at the same audit firm.

The new law has, however, come with some relief to certain sectors of the economy with employees now enjoying tax free expenditures on vacations in a move aimed at encouraging domestic tourism.

Airlines are also going to benefit in a big way with Value Added Tax on aeroplanes being exempted. This is expected to lead to lower air fares in the long run.

The power and energy sector is also seeing better days ahead with the new Act exempting VAT on solar equipment which is expected to see a jump in the manufacture and use of solar power. This is likely to lead to reduced prices of electricity.