It is now one year since the implementation of the Finance Act, 2022. Capital Gains Tax (CGT) has since 1 January 2023 been charged at a rate of 15% up from 5%. This may be a timely juncture to assess the overall effect of the increased CGT.
CGT is a tax charged on the profits made on the sale or transfer of property. This includes the sale or transfer of land and shares. The obligation to pay CGT arises at the point a sale occurs and the duty to pay falls on the person transferring or selling the property.
In a bid to grow the economy, specifically the real estate market and capital markets, the government suspended CGT in 1985. Since then, the real estate market has significantly contributed to Kenya’s GDP. The suspension of CGT is partly to thank for this as it encouraged both local and international investors to venture into the sector, resulting in a boom in the real estate market.
With the increase in government expenditure, CGT was reintroduced. Pursuant to the Finance Act, 2014, the government reintroduced CGT effective 1 January 2015 at the rate of 5%. The reinstatement of CGT was also aimed at widening the tax base and ensuring that Kenya was aligned with neighbouring countries that were already charging CGT.
To further streamline the tax regime, the Finance Act, 2022 sought to increase CGT from 5% to 15% effective 1 January 2023.
One year later, what impact has the increase in CGT had? It was predicted that an increase in CGT would negatively affect the property market. Before its implementation, it was argued that a marked increase in CGT would ultimately stagnate the real estate market causing a decline in the sale of property. So much so that industry players and economic analysts urged the government to increase CGT to 10%, as opposed to 15%.
As of the first quarter of 2023, tax revenues from the real estate and private share transactions amounted to Kes 3.28 billion according to revenue statistics by the National Treasury. This marked a 12.92% decrease from Kes 3.76 billion recorded during the same period in 2022, potentially indicating a decline in property transactions.
However, despite the increase in CGT the real estate market has continued to thrive with the continuing demand for housing, retail space and land. In the third quarter of 2023, the real estate sector grew by 6.2%, compared to an improvement of 4.0% in the third quarter of 2022. This is according to the Kenya National Bureau of Statistics GDP Quarter 3 report.
If anything, CGT may not be the greatest challenge to the real estate market, if at all. The decline in tax collections from overall property transactions might be because of the increasing cost of living which has significantly constrained the disposable income of many Kenyans.
This economic strain mirrors global trends, with nations worldwide contending with uncertainties stemming from the aftermath of the Covid-19 pandemic, global conflicts, and political instabilities.
A further problem is that the law does not provide for inflation adjustment. Inflation adjustment, otherwise known as indexation, would allow sellers to adjust the cost of their property to current prices based on the present-day inflation rate. This is necessary to ensure that investors are cushioned against the effects of the high inflation rates.
Nevertheless, the Kenyan real estate market continues to soar. It is worth noting that Kenya has a relatively lower CGT rate compared to other regional players. Uganda charges a rate of 30% as part of business income, Zimbabwe 20% while South Africa imposes a rate of 18% for individuals and 21.6% for companies. Additionally, Kenya's status as a key economic hub and its position among the fastest-growing economies in Africa enhances investor confidence.
It is premature to draw a concrete conclusion regarding the specific effects of the CGT increase on the property market at this stage. Nevertheless, it is imperative that the government and other stakeholders diligently track revenue collections and the overall economic growth. As for now, the jury is still out.
The article was featured in the Business Daily and can be accessed here.