As of January 1, 2023, the capital gains tax (CGT) rate has risen from five percent to 15 percent, as stipulated by the Finance Act, 2022. It is now opportune to evaluate the broader impact of the augmented CGT on profits generated from the sale or transfer of assets, encompassing land and shares. The responsibility for CGT payment emerges at the time of a property sale, and the obligation to pay lies with the individual initiating the transfer or sale.
In 1985, the government took a significant step to stimulate economic growth, particularly in the real estate and capital markets, by temporarily halting the implementation of capital gains tax (CGT). Since that decision, the real estate market has played a substantial role in boosting Kenya’s GDP. The suspension of CGT played a crucial role in this success, as it incentivized both local and international investors to engage in the sector, leading to a notable expansion in the real estate market.
As government spending rose, capital gains tax (CGT) was reinstated. In accordance with the Finance Act of 2014, the government reintroduced CGT, effective from January 1, 2015, with a five percent rate. This reintroduction aimed to expand the tax base and bring Kenya in line with neighbouring countries that had already implemented similar taxes.
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What impact has the increase in CGT had?
The anticipation was that a rise in CGT would have adverse effects on the property market. Prior to its enactment, there were concerns that a significant increase in CGT would lead to a decrease in property sales. To address these concerns, industry experts and analysts recommended that the government consider reducing the tax rate to 10 percent.
As of the first quarter of 2023, revenue statistics from the Treasury indicated that tax revenues generated from real estate and private share transactions totalled Sh3.28 billion. This represented a 12.92 percent decline from the Sh3.76 billion recorded during a comparable period in 2022.
Nevertheless, in spite of the heightened CGT, the real estate market has sustained its prosperity due to ongoing demand for housing, retail spaces, and land. In the third quarter of 2023, the real estate sector experienced a growth of 6.2 percent, surpassing the four percent improvement recorded in the same period of 2022, as reported by the Kenya National Bureau of Statistics.
It appears that CGT might not pose the most significant challenge to the real estate market. The decrease in tax collections from overall property transactions could be attributed to the rising cost of living, which has substantially limited the disposable income of many Kenyans.
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The economic challenges reflect a global pattern, as countries across the world grapple with uncertainties arising from the aftermath of the Covid-19 pandemic, international conflicts, and political instabilities.
Another issue is the absence of provisions for inflation adjustment in the law. Inclusion of inflation adjustment, also referred to as indexation, would enable property sellers to align the cost of their property with current prices, taking into account the prevailing inflation rate.
This is essential to safeguard investors from the impacts of elevated inflation rates.
Despite this, the real estate market in Kenya continues to thrive. It is noteworthy that Kenya maintains a comparatively lower CGT rate when compared to other neighboring countries. Uganda imposes a 30 percent rate as part of business income, Zimbabwe enforces a 20 percent rate, while South Africa applies rates of 18 percent for individuals and 21.6 percent for companies.
Furthermore, Kenya’s role as a significant economic center and it’s standing as one of the fastest-growing economies in Africa boost investor confidence.
Drawing definitive conclusions about the specific impacts of the CGT increase on the property market is premature at this point. However, it is crucial for the government and other stakeholders to monitor revenue collections and overall economic growth.
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