Kenya: Confusion continues to rein in the stock market over introduction of capital gains tax (CGT). This follows a stand-off between stockbrokers and the taxman over how the tax will be administered.
While the Kenya Revenue Authority (KRA) insists stockbrokers should collect the tax, which came into effect on January 1, on behalf of their clients, the latter say the responsibility rests with individual taxpayers.
A section of stockbrokers said there are grey areas in implementation of the tax, and they cannot start making the five per cent deductions from their clients’ transactions until they are gazetted as collecting agents.
However, KRA Commissioner-General John Njiraini said in respect to stock market transactions, the responsibility to collect and account for capital gains tax lies with the stockbroker or agent handling the sale and transfer of shares or bonds. “This position is well-articulated in the 8th schedule, Paragraph 18, on which there is no ambiguity whatsoever,” said Njiraini.
KRA is looking to net about Sh7 billion from the tax over the next six months, this year, after a 30-year-long hiatus. But there seems to be more confusion. “On shares at the Nairobi Securities Exchange (NSE), there is considerable confusion on how the tax will be administered,” said Nikhil Hira, Tax Partner Deloitte & Touche East Africa. The old Eighth Schedule dealing with the tax has been reinstated, giving the Commissioner General powers to make stock brokers collection agents.
READ MORE
Officer who locked couple's house for a week ordered to pay Sh700,000
Behind-the-scenes rush as clock ticks for sale of Bamburi Cement
When Ruto and the Church began reading from different scriptures
However, of concern is that the law being used dates back to 1985, when perhaps the NSE was less active.
Worst hit
“There are several other complications today, which means simply saying brokers will collect may not be the answer,” Hira said. One example is the insurance companies that buy and sell securities but are taxed under Section 19 of the Income Tax Act as business income.
Although section 19 exempts tax income earned by insurance companies from disposal of investment shares traded on the NSE, this fact has not been included in the Guidelines on Capital Gains Tax issued by the KRA in December 2014. “If brokers have to deduct the tax on all transactions, then there is a possibility that insurance companies will be taxed on income that is actually exempted under section 19.
Given this type of complication, the market will probably be unsettled until the mechanics of accounting for the tax are clear,” Hira explains.
Association of Kenya Insurers Executive Director Tom Gichuhi said the insurance industry will be hard hit because it is among the largest investors in real estate and stock market. “This will impact negatively on insurance firms, including affecting their ability to pay claims,” Gichuhi noted, adding that though the five per cent may look small, cumulatively, would be a lot of money.
Besides the stock market, analysts warn that the five per cent capital gains tax could also hit investments in property and the country’s nascent oil and mining sectors.
Joshua Otiende, research analyst at ABC Capital Ltd says the new tax will make the NSE uncompetitive within other jurisdictions it competes for global portfolio investment. “It would also impact the future performance of the capital markets, adversely and negatively affect the market’s liquidity,” said Otiende.
However, on property, Hira doesn’t think there will necessarily be adverse effects. “Most developers are subject to corporate tax as their business is to buy and sell, so the capital gains tax is not an issue,” he said. Also the low rate (relative to other countries where the tax is levied) makes it easier to absorb for those investing for purposes of realising long term capital gains. “However, should the rate be increased significantly in future, it could slow down activity in the property sector if the returns in the sector do not remain attractive,” he added.
On the extractive industry, Hira said the gains are going to be taxed at corporate rates not at the five per cent. “To me, this difference in treatment is not fair nor justified. I also feel that if you over tax this sector when it is still developing, it will not progress as we want,” he warned.
The NSE 20 index shed 0.7 per cent week-on-week while the NSE All Share Index (NASI) recorded a marginal 0.1 per cent week-on-week gain. The market was lackluster with turnover coming in 72.6 per cent week-on-week lower at Sh1.47 billion. “Investors this year have so far shied away from trading as they await implementation of the Capital Gains Tax,” said Standard Investment Bank in its weekly review.
Prior to the signing of the Finance Act 2014 into law, the tax was suspended from June 1985. By re-introducing it, the Government aims to increase tax revenue.
