Kenyan court rules against advance capital gains tax

A Kenya Judge has barred The Kenya Revenue Authority (KRA) from demanding advance capital gains tax payments from investors before completion of asset sales, annulling new regulations on the levy.

Justice John Mativo ruled that paragraph 11A of the Eighth Schedule of the Income Tax Act infringes on the rights of both buyers and sellers by demanding that capital gains tax be paid before completion of asset sales.

He argued that the regulation could hinder transactions as some buyers and sellers may not have the financial muscle to make tax payments before completing asset sales. This, according to him contradicts the public’s right to property hence making it in contrast with the Constitution.

The Law Society of Kenya (LSK) last month sued the KRA arguing that the new regulations had stalled several deals worth millions of shillings. The regulations required investors to remit capital gains tax upon presentation of the asset at the centre of a sale deal, rather than after completion of the transfer process as was before.

The KRA had argued that the disputed regulation was only added to make clear when capital gains tax is due, and that it neither contradicted other sections of the Income Tax Act nor the Constitution.

Attorney-General Githu Muigai argued that in the present dispute, public interest inclines in the taxman’s favour as to when capital gains tax is due. There were also claims of attemps to engage by LSK, which they said were ignored by the KRA, forcing the former to take legal action.

The KRA began implementing the disputed clauses on January 30, and the LSK insisted that it risks affecting Kenya’s economy by frustrating land deals, which have now stalled.

On the other hand, the taxman insisted that the new regulations were in line with both the Income Tax Act and international accounting standards, which provide that levies should be paid when revenue is earned, and not when received.