property taxes

The recently published Tax Laws (Amendment) Bill, 2020 has elicited mixed reactions from tax experts, legal and sector players.

The bill follows President Uhuru Kenyatta’s address on 25th March that set out fiscal plans to combat the economic impact of COVID-19 on Kenyans.

Kenya Revenue Authority attached to the President’s tax relief measures a significant number of changes in the bill which proposes to make amendments to tax-related laws in Kenya including the Income Tax Act (CAP 470), VAT and other tax laws.

Tax experts say the new law would adversely affect the real estate industry. First, the bill proposes to abolish two key exemptions on capital gains tax (CGT) from the First Schedule to the Income Tax Act.

The act allows CGT exemption for a private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer, and a CGT exemption where the land sold has a value of less than KES 3 million (approx. USD 30,000) or consists of agricultural land outside a municipality and which is less than 50 acres in size.

According to Anjarwalla & Khanna advocates, the move would negatively affect investments in the affordable housing program and impair the long-term savings of Kenyans who acquire homes. In addition, it would be counterproductive to the government’s intention of protecting low-income Kenyans.

The bill also proposes to delete the provisions in the Income Tax Act relating to House Ownership Savings Plan (HOSP) which will do away with tax deductions allowed in respect to contributions made to any registered HOSP. The current regime provides an incentive for first-time home-buyers, which is in line with the government’s Big Four Agenda.

The bill also proposes to overhaul the investment allowances regime under the current income tax act with the following changes:

For commercial buildings, the new bill also proposes to reduce the rate of capital allowances from 25 percent to 10 percent on a reducing balance basis

For hotel buildings, the new rate will be 50 percent for the first year and 25 percent for subsequent years on a reducing balance basis excluding cost of land. The current rate in Income Tax Act allows for 100 percent deduction in the first year of use.

Capital allowances of 10 percent on a reducing balance basis for student hostels and other educational buildings, from the current rate of 50 percent. The educational building must be licensed by the competent authority for the investment allowance to be deducted.

“In our view, therefore, it would be preferable for the Government to pass the emergency measures intended to mitigate the effects of COVID-19 first, and to expose the far-reaching tax measures to adequate public participation as required by the Constitution of Kenya,” said Legal firm Anjarwalla & Khanna in a review of the new scheme.

The bill is due for discussion in parliament on 8th April, 2020 before the President may assent to it as law.

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