Caught between increasing tax revenue, and incentivising real estate investment
BY APOLLO KARUMBA AND AGNES GITAU
Recent Kenya National Bureau of Statistics (KNBS) data shows that approvals for houses were the lowest since 2014, when value of building approvals stood at KSh205 billion. Developers have blamed a gridlocked economy that hurt demand for residential housing and office space.
To address the above, the Government has tried to offer a mix of tax incentives aimed at encouraging investors to undertake more investments in this sector that was hitherto very lucrative. However, on the other hand, the Government has been increasing tax rates on some real estate products with an aim of increasing tax collections. This therefore, begs the question; has the Government offered enough tax measures that would encourage growth of Kenya’s real estate sector to increase the tax revenue to exchequer?
With respect to tax incentives, for instance, the Government has provided the exemption from tax of Real Estate Investment Trusts (REITs) effective 1st January 2012. REIT is commonly known as a vehicle that enables investors to pool resources together and source funds to build or acquire real estate assets which they would sell or rent to generate rental income. This is to enable the shareholders to receive a bigger share of the profits or returns. This has encouraged many investors to put their money in the real estate sector. In addition, the Finance Bill 2019 proposes to extend the exemption of tax to companies through which REITs hold property. However, the REITs have been a flop overall in Kenya since investors lack appetite for their update.
The other income tax incentive is with respect to industrial building allowance which is claimable on the cost of normal industrial buildings at the rate of 10 per cent. Cost of construction being highly cash intensive, a 10 per cent allowance is seen as an incentive as it would enable the investors to recoup the investment costs over 10 years period.
In addition to the above income tax incentives, the Finance Act 2018 introduced a reduced tax rate of 15 per cent for companies that would put up more 400 residential units within a year of income, however, subject to approval by Cabinet Secretary responsible for housing.
The Housing Fund
Further, the Government has tried to achieve one of the Big Four Agenda of providing affordable housing though introduction of the housing fund. In 2018, The Government introduced tax exemption for National Housing Development Fund through amendment of the Employment Act in 2018. Under the proposed fund, the employer and employee are both expected to contribute 1.5 per cent of the employee’s gross monthly earnings subject to a maximum of KSh5,000. While this proposal has received a lot of criticism from various stakeholders, it was meant to enhance residential housing projects in the country. The Government further, through the Finance Bill 2019 proposes to exempt the NHDF from tax on the funds received to ensure that the funds are available for their intended use in line with the Big Four Agenda flagship of affordable housing.
Still taxed despite incentives
Despite the above incentives, the sector continues to perform dismally. Could this dismal performance be due to taxation of the sector? From taxation of the real estate sector perspective, first, there is stamp duty which is a tax paid on home and land transfer. The tax is charged on the market value of the property at the rate of either 4 per cent in towns or 2 per cent in rural areas and must be paid to the taxman within 30 days after execution of the contract. Fresh statistics from KNBS show that the National Treasury expects revenue from stamp duty to dip to KSh9.51 billion from KSh12.13 billion recorded in the previous year ended June 2018. The decrease in revenue from stamp duty is another pointer to reduced dealings in land and houses, reflecting the recent slump in activities in real estate sector.
Second, there is Capital Gains Tax (CGT), introduced effective 1st January 2015 at the rate of 5 per cent. The introduction of this tax is unfair owing to lack of indexation to cater for inflation effects for properties acquired over time. However, the Government through Finance Bill 2019 has proposed to more than double the CGT rate on gain upon disposal of property from the 5 per cent to 12.5 per cent aimed at increasing the revenue collection in the sector.
Generally, there has been a slow growth in the real estate owed to several challenges such as over-supply in some segments; demand seems to be constrained to some extent owing to potential buyers who are faced with limited credit. The limitation of credit was especially widely experienced following the capping of interest rates by the Central Bank of Kenya to lending banks. However, the Finance Bill 2019 has proposed to repeal interest capping in a bid to allow small and medium sized companies as well as individuals to access credit. One would wait and see whether the interest rate capping and access to more credit from commercial banks would increase demand for housing units.
Apollo Karumba is a Tax Manager while Agnes Gitau is a Senior Associate with Bakertilly CPA.