State eyes Sh100bn from landlords in fresh tax push

The government aims to get Sh83 billion more from landlords in a revamped tax system under works spearheaded by the Ministry of National Treasury and Economic Planning.

It is the latest attempt by the government to net landlords who have been slippery to the taxman despite attempts to woo them into the tax bracket.

National Treasury and Economic Planning Cabinet Secretary John Mbadi cited landlords among the taxpayers that the government is targeting with the new system.

Others are professional individuals like doctors, lawyers, and accountants who, in addition to their formal jobs, also do consultancy work.

This new system in the works comes just two years after the government reduced rental income tax payable by landlords from 10 per cent to 7.5 per cent.

However, according to the CS, who spoke at the Kenya Revenue Authority (KRA) Tax Summit 2024 held in Nairobi, the government is getting a raw deal as the sector has the potential to provide more.

“We are only collecting Sh17 billion per year and we have the potential to collect at least Sh100 billion,” said the CS.

“Many of us here, own property, and we know the scope but we are not paying rental income tax that is 7.5 per cent.”

The CS noted that the system that is in place cannot capture those who need to pay the rental income tax. Landlords need to file their taxes using the iTax system, which the CS said is not working as it should.

This is the umpteenth time the government has fumbled to bring landlords on board with several attempts before having not succeeded as envisioned.

Despite data from the Kenya National Bureau of Statistics (KNBS) indicating that the country has more renters than homeowners in the urban setting, KRA and its parent ministry are yet to find a way to capture all landlords.

According to the KNBS 2019 Census, the proportion of households owning the main dwelling unit they occupied was 61.3 per cent while those who were renting stood at 38.7 per cent.

Out of the 12.1 million households then, 7.3 million own their dwelling while 4.6 million are renters. Nairobi City County is reported to have 138,976 owners of their dwellings and 1.4 million renters.

The dependence on amnesty may not be working for landlords even as data shows increased revenue from such exercises. In 2015 KRA did give landlords a 100 per cent amnesty if they registered as taxpayers.

In 2022, the taxman conducted a census of some sort in partnership with the Nairobi City County to bring on board landlords.

“Kenya Revenue Authority will undertake a data collection exercise on rental properties within Nairobi City County and Nairobi Metropolis as part of its tax base expansion programme from October 19, 2022,” read the notice.

The notice called on the public, particularly tenants, to comply with the authority’s officers by providing the necessary information as requested.

KRA’s plan has always been to go beyond landlords, a majority of whom operate informally, and bring on board real estate companies and agents who do property management.

Registered taxpayers

The iTax system that KRA depends on which only encourages self-reporting, as the CS said, may not be adequate to rake in Sh87 billion more.

“The system we have in place is not able to see those who are supposed to pay this tax. Visibility is low,” said CS Mbadi. “We are not saying we go back and have you pay for the other months. We want you to start paying.”

He added: “So if you were not paying, please start paying. I am not exempting you from paying the previous months. But if you can start paying from today, I will be comfortable.”

In the 2015 amnesty, KRA had a target of over 60,000 landlords by 2018 as it was estimated to collect Sh3 billion in the 2015/16 financial year. By September 2015, the authority had 20,000 landlords on its records as registered taxpayers.

The 2015 amnesty on rental income, which was on principal taxes, penalties, and interest, was the first to be introduced to landlords as the then Finance Cabinet Secretary Henry Rotich agonised over ways to raise money to fund the budget.

A 2020 study published by KRA KRA-affiliated institution Kenya School of Revenue Administration (Kesra) titled, Factors Affecting Collection of Residential Rental Income Tax in Westlands Area, Nairobi, Kenya, found that property owners have adequate knowledge of tax rates, the basis of taxation, and compliance requirements under the residential income tax regime.

It also found that owners and managers of real estate in Westlands, Nairobi, are conversant with the then-new KRA iTax system, and knew how to file their residential rental income returns online.

The study authored by Mercy Nafuna Nyongesa recommended that KRA should invest more in technology and also create awareness of its usage by taxpayers to encourage landlords to comply.

“KRA should revise its fines and penalties to make them more severe to encourage tax compliance,” the study recommended. 

It adds that the government should be more involved in making laws that encourage compliance by improving the taxpayer’s attitude.

“To deal with voluntary tax payment compliance, taxpayers need to understand the reasons why they pay or ought to pay,” the study says.