An Analysis Of The Proposed Finance Bill, 2023:The Key Changes and Impact on the Real Estate Sector

On 4^th May 2023, the National Treasury tabled the Finance Bill, 2023, to the National Assembly for the first reading. The proposed Finance Bill 2023 introduces a series of significant changes and reforms to the financial landscape of the country. The Bill is a crucial component of the annual budgetary process and outlines the Government’s plans for revenue generation, taxation, and fiscal policies.  With its ambitious and far-reaching proposals, the Finance Bill 2023 has sparked significant discussion and deliberation among various stakeholders, including taxpayers, businesses, industry experts, and policymakers.

Below is an analysis of the key changes proposed in the Bill in relation to the real estate sector:

THE EMPLOYMENT ACT, 2007

Contributions to National Housing Development Fund

Proposal: The Bill proposes to introduce mandatory contributions to the National Housing Development Fund by both the employee and employer who will be required to contribute 3% of the employee’s basic salary. However, the total contributions from both parties should not exceed five thousand shillings per month.

According to the proposed amendment, the above contributions will be utilized for purchasing a home for individuals eligible for the affordable housing scheme. The ineligible may after seven years or upon attaining the retirement age whichever comes earlier, have the option of transferring the contributions to a pension scheme; to persons eligible for affordable housing; their spouses and dependent children; or receive it in cash. However, it should be noted that the cash withdrawals will be subject to taxation.

Implication: This proposal aligns with the government’s commitment to providing affordable housing to Kenyans as part of its Big Four agenda. However, the imposition of mandatory contributions has been met with criticism by many Kenyans as it will overburden employees and have adverse effects on employment in light of the current economic challenges.

Proposed effective date: 1^st July 2023

INCOME TAX ACT (CAP 470)

1. Capital Gains Tax

In regard to the real estate sector, the Bill proposes the following amendments to Capital Gains Tax effective from 1^st July 2023:

• A broader definition of immovable property

Proposal: The definition of “immovable property” seeks to encompass land (whether covered by water or not), any estate, right, interest, or easement in or over any land, as well as anything permanently fastened to anything attached to the earth. It also includes a debt secured by a mortgage or charge on immovable property, as well as a mining right, an interest in a petroleum agreement, information related to mining or petroleum, and information related to any agreement involving mining or petroleum.

Implication: By broadening the definition of ‘immovable property,’ the tax base is expanded, resulting in the inclusion of transfers and indirect disposals that were previously exempt from CGT and bringing them within the scope of the Income Tax Act.

• Properties owned by Partnerships to be subjected to CGT

Currently: CGT only applies to individuals and companies; partnerships are exempted.

Proposal: Gains on the transfer of properties owned by partnerships and situated in Kenya will be subjected to Capital Gains Tax.

Impact: The scope of taxable transactions has been broadened as it extends to gains made on the transfer of properties owned by Partnerships. This proposal aligns with the Government’s objective of expanding the taxable scope by incorporating transactions that were not covered under the ITA.

• Due date on payment of CGT

Currently: CGT is payable by the transferor on or before the 20^th day of the following month in which the transfer of the property is effected.

Proposal: The Bill proposes to have the due date for CGT payment made either on receipt of the full purchase price by the Vendor (earlier) or upon registration of the transfer(later).

Impact: This new amendment is timely and provides clarification to the highly contested issue as to when CGT is payable. In the case of Law Society of Kenya v Kenya Revenue Authority & another [2017] eKLR, the High Court declared that Paragraph 11A of the Eighth Schedule to the Income Tax Act is in clear violation of Article 201 (b) (i) of the Constitution of Kenya as the provision unfairly places a tax burden on the public by requiring taxpayers to pay capital gains tax prior to presenting the transfer instrument for registration, rather than upon the actual registration of the transfer instrument in favor of the transferee.

• Adjusted Costs

Currently: When a Vendor sells a property that is subject to payment of CGT, then he/she is allowed to deduct adjusted costs from the gains received from the transfer such as acquisition costs, renovations, legal fees etc. In a subsequent sale, the consideration or the amount of money one received from the sale of the property the first time, will be considered as the cost for the second sale, and so on.

Proposal: The Bill proposes that if a vendor transfers (sells) a property in a non-taxable transaction and subsequently transfers it within a period of less than five years in a taxable transaction, then adjusted cost for the subsequent(second) transfer will be based on the original adjusted cost from the first transfer.

Impact: The provision is designed to prevent vendors from manipulating the consideration (the purchase price) in property transactions by artificially increasing the base cost of the property and thereby reducing their taxable gains. Therefore, the proposed amendment ensures that the original consideration is taken into account for subsequent transfers, thus preventing the manipulation of the property’s value for tax purposes.

2. Withholding Tax

• Reduction of Withholding on lease premium and residential rental income

Currently: The withholding tax on rental income is at a rate of 10%.

Proposal: The Bill proposes to reduce the withholding tax rate from 10% to 7.5% on rental income and lease premiums.

Impact: This proposal will take effect from 1^st January 2024 and is a welcomed move as it seeks to reduce the tax burden on landlords and increase tax compliance.

• Property Managers

Proposal: The Bill proposes to amend the ITA and introduce a provision that empowers the Commissioner to appoint tax agents who receive rental income on behalf of landlords (property managers) to deduct the rental income tax at the prescribed rate, and thereafter remit it to the Commissioner within 24 hours.

Implication: This proposal is aimed at increasing tax compliance for property owners by ensuring they regularly declare their rental income tax in good time. However, the 24-hour timeline seems impractical and will increase the compliance burden on property owners and costs on property managers.

Proposed effective date: 1^st July 2023

(c) Withholding tax payment date

Proposal: As provided in (b) above, the Bill proposes to change the payment of WHT from the 20^th day of the month following when the deduction was made to 24 hours after payment is made.

Implication: While the new timelines will boost tax compliance, the 24-hour timeline is likely to bring administrative and accounting challenges.

Proposed effective date: 1^st July 2023.

3. Capital Allowances

Introduction of industrial buildings and docks capital allowances

Proposal: The Bill includes a proposal for capital allowances for industrial buildings and docks at a rate of 10% in equal installments.

The proposed definitions for the above terms are:

• Dock refers to a container terminal berth, harbour, wharf, pier, jetty, storage yard, or other works in or at which vessels load or unload merchandise but does not include a pier or jetty used for recreation;
• Industrial Building refers to a building in use for the purpose of transport, bridge, tunnel, inland navigation, water and electricity or hydraulic power undertaking.

To foster the development of the blue economy and stimulate economic growth in Kenya’s coastal region, the Government has initiated measures to attract investment. This proposal aims at providing tax incentives that will promote investment in the transport, shipping, logistics and energy sectors.

Proposed effective date: 1^st January 2023

MISCELLANEOUS FEES AND LEVIES ACT, 2016 AMENDMENTS

Removal of IDF on imports in the construction industry

Currently: IDF is payable on all imports into the country at a reduced rate of 1.5% on raw materials, intermediate goods and inputs for the construction of houses under the approved affordable housing scheme.

Proposal: The Bill seeks to delete this provision in its entirety.

Implication: The proposal reverts the IDF rate to 2.5% which will have an impact on manufacturers and participants in affordable housing construction, as they will be burdened with additional importation costs. This action appears to contradict the government’s objective of bolstering the construction and building material value chain. Consequently, it is anticipated that manufacturers will transfer the extra expenses to consumers by increasing the prices of their products.

Proposed effective date:1^st July 2023

TAX APPEALS TRIBUNAL ACT

• Security on Appeal

Proposal: The Bill proposes to amend section 32 of the Tax Appeals Tribunal Act, 2013 and introduce a requirement for taxpayers to deposit 20% of the disputed tax amount or provide equivalent security to the Kenya Revenue Authority (KRA) before filing an appeal at the High Court against a Tax Appeals Tribunal decision. In the event that the High Court rules in favor of the taxpayer, the KRA is obligated to refund the deposited amount or return the security within 30 days after the appeal’s resolution.

Implication: The above requirement is likely to restrict a taxpayer’s ability to exercise their right to appeal. There are concerns that the provision may act as an incentive for KRA to exaggerate their assessments with the aim of collecting 20% of such tax assessments in case of a win. Further, KRA may not fulfill its commitment to reimburse the deposited amount within the specified timeframe despite a favourable ruling by the High Court or offset the deposited amount against future tax liabilities. This may lead to financial strain, affecting the taxpayer’s ability to meet other financial obligations and liquidity.

Proposed effective date:1^st July 2023

• Change of Documents to be used on Appeal

Currently: Under section 13 of the Tax Appeals Tribunal (TAT) Act, the appeal process requires the appellant to file: a notice of appeal, memorandum of appeal, statement of facts, and the tax decision to the Tribunal.

Proposal: The Bill proposes that appellants to the Tax Appeals Tribunal submit an “appealable decision” instead of the “tax decision”, the memorandum of appeal, statement of facts, and any other documents as may be necessary to enable the Tribunal to make its determination.

Impact: This proposal is a positive development as it brings clarity regarding the submission of an appealable decision and aligns with Section 52 of the Tax Procedures Act. This section states that individuals who are dissatisfied with appealable decisions have the right to appeal to the Tax Appeals Tribunal. This ensures consistency and a clear understanding of the documentation needed for the appeal process.

Proposed effective date:1^st July 2023

Our take away

The real estate market functions efficiently and effectively as it is based on the principle of a willing buyer and a willing seller. The Government’s proposal to implement a blanket approach of introducing mandatory contributions to the National Housing Development Fund by both employees and employers by deducting 3% of an employee’s basic salary has received immense criticisms and may not yield the expected result. Kenyans are at various stages of their lives and their priorities differ when it comes to housing.

Reduction of the rental tax income from 10% to 7.5% is a positive development, however, providing a 24-hour timeline for tax compliance is impractical and will result in administrative and accounting challenges. Further, the proposal for payment of CGT to be made on receipt of the full purchase price by the Vendor or upon registration of transfer is welcomed as it goes a long way to clarify and resolve the dispute as to when CGT should be payable.

Written by Cynthia Kitolo
Legal Officer & Advocate of the High Court of Kenya