Why brokers are opposed to capital gains tax

 

BY JAMES MULIRO

A tug of war between stock brokers and the Kenya Revenue Authority continues to persist over the implementation of the law on capital gains tax (CGT). The dispute, which is now before court, has seen stockbrokers maintain that they are not obligated to collect the tax despite insistence by the taxman that the onus lies with the brokers and not the clients.

 According to the Kenya Association of Stockbrokers and Investment Bankers (Kasib) Willie Njoroge, they do not know of any jurisdiction in the world where brokers are liable for collecting the tax on its behalf.

“The process of collecting the tax is expensive, complex and time consuming,” Njoroge says. “What we are saying is that it is not practical for the stockbrokers to collect the tax,” he said.

Kenya re-introduced the CGT on net gain accrued from transfer of mining rights, sale of property and marketable securities – such as equities and bonds – in August last year, with government hoping to raise about Sh7 billion to fund its burgeoning budget. The CGT, which is five per cent of the net gain accruing from the sale of equities, bonds and property, became effective on January 1 this year.

The tax was abolished 30 years ago to allow the real estate and the securities market to thrive. Before its abolition, it imposed a 30 per cent charge on the net accruing from the sale of shares and property.

And on January 26, the brokers went to court to challenge the implementation of the tax, and to shield themselves against possible dangers that may arise from their inability to collect the levy. In a case filed at the High Court, the brokers argued that the re-introduction of the capital gains tax demanded from investors is unrealistic and will lead to paying taxes twice.

They also argue that, after a three-decade freeze, the move has brought uncertainty on how to deal with taxes accrued after sale of shares and thus creating a difficult scenario, both for the stock brokers and investors.

Analysts have variously indicated the tax will negatively affect the capital markets and the economy, even as the government tries to position Nairobi as the financial services hub for the Eastern and Central Africa region. 

As a result of its reintroduction, foreign institutional investors who constitute more than half of traders at the Nairobi Securities Exchange (NSE) are likely to avoid investing in the country’s capital market to avoid the technicalities associated with complying with the tax law.

“If we make trading in Kenya complicated for them, they will quickly dismiss the country as an investment destination. If we decide we are now chasing away 65 per cent of our clients, we are killing our markets,” Njoroge notes.

Lawyer Kiragu Kimani, who is representing the brokers, in his affidavit filed at the court, says that trade volumes at the Nairobi Securities Exchange (NSE) have dropped by more than 70 per cent since the re-introduction of CGT, adding no other factors would have been attributed to the decline in trade in the market other than the new law. 

“The Finance Act introduced a new rate of taxing capital gains without repealing the previous rate. The Kenyan taxpayers now run the risk of being subjected to two different rates of taxation for the same tax. I believe that the growth of the Nairobi Security Exchange has been attributed to the suspension of Capital Gains Taxes.”

Mining, oil and gas sectors are taxed at 30 per cent for locals, and 37.5 per cent for non-residents. Analysts argue that the tax will reduce hard currency inflows and weakening the local currency, by virtue of the fact that foreign investors, who constitute the majority of participants in the market, are likely to look for alternative markets where the market is exempt from the tax. 

The CGT on property has however, not been met with much resistance as that on equities and bonds, as it will be collected in the same way stamp duty fees are collected.

 

Says Njoroge: “Today, the NSE is operating at 20 per cent of what was traded in December last year.”  

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