Options for the government to fully explore potential in property ownership
By JOB KABOCHI AND KENNEDY OKOYO
The real estate sector in Kenya has proved to be one of the business frontiers with huge growth potential that can significantly contribute to Kenya’s exchequer through various taxes. The sector has multiplier effects virtually across all sectors of the economy and contributes to the overall growth and development of the country. It is no wonder that one of President Uhuru’s legacy projects – affordable housing – directly falls within the sector.
Increasing tax revenue
In this regard, the Government of Kenya depends on taxes to finance its budget including the ‘Big Four Agenda’. However, in the recent years, it has experienced shortfalls in tax collection. One of the ways of increasing tax revenue is through broadening of the tax base, which entails bringing more taxpayers into the tax bracket either by taxing existing businesses not previously taxed or encouraging the establishment of new businesses by incentivising growth and ultimately enabling them to succeed and pay taxes.
In the recent past, Kenyans have developed an insatiable appetite for real estate leading to a sharp growth in the number of players in the sector including financial institutions, brokers, land speculators, co-operative movements, as well as informal savings societies, popularly known as chamas. However, it is debatable whether the sector contributes its fair share of revenues for the Government.Real estate encompasses one of the four critical factors of production—land. The other three being labour, capital and entrepreneurship.
In the contemporary economy, interests in real estate can be used to acquire capital by securing credit facilities from financial institutions using title deeds as collaterals. Thus, real estate can be thought of as contributing half of the four factors of production. A report on land-based financing for urban infrastructure in sub-Saharan Africa by the African Centre for Cities at the University of Cape Town notes that land-based finance instruments allows funding to be raised through increasing property rights.
The aforementioned report underscores the role played by real estate in mobilising funds for key development areas such as infrastructure, especially in developing economies like Kenya that require substantial infrastructural development to spur economic growth. The Economic Survey 2018 report by the Kenya National Bureau of Statistics noted that the real estate sector’s contribution to the overall growth of the Kenya’s Gross Domestic Product (GDP) was 10.6 per cent and 12.2 per cent in the years 2017 and 2016 respectively. The sector’s contribution to GDP has risen steadily from the year 2013 when it was 5.8per cent peeking in the year 2016 at 12.2per cent, and slightly dipping to 10.6 per cent in 2017, mostly due to the prolonged electioneering period.
Sealing the tax leakage
One would expect that the growth in the real estate sector would be aligned to the Government’s revenue collection from the sector but is often not the case. For instance, the introduction of withholding tax on rental income in 2017 was a positive step but which has not yielded an increase in tax collections as envisioned. Information from banks like mortgages taken by individuals/corporates, information on electricity connections or water connections could help provide insight to the KRA to help seal the tax leakage from the sector. Indeed, the Tax Procedures Act, 2015 allows KRA to obtain information on tax liability relating to any person from third parties such as banks and use such information for tax purposes. However, concerns over data confidentiality have plagued KRA’s attempts to obtain information from third parties.
Communal tenure systems
Another impediment to Government’s revenue collection is the fact that huge chunks of land in Kenya are adjudicated under customary/communal tenure system, which makes it difficult to sell the land or use it to secure capital to be used for other economic activities. One can only imagine the enormous contribution to GDP the real estate sector would make if the land were easily convertible to capital to fund investment projects.
The closest Kenya came to improving land productivity was in 2015 with the proposed Minimum and Maximum Land Holding Acreage Bill, 2015. The Bill’s objective included prescribing the minimum and maximum acreage one can hold in various counties, facilitating self-employment, sustainable utilisation of private land and promoting national security and economic stability. Even though the Bill never materialised, some counties have attempted to repossess undeveloped land within their jurisdictions. Perhaps, the Kenyan Government could consider introducing ‘idle land tax/rate’ on unutilised land parcels.
In conclusion, there is a need to encourage investment in the sector through formulating a sound regulatory which environment. A regulatory environment protects the interest of investors but equally ensures a fair contribution to the exchequer.
Job Kabochi is a Partner and Kennedy Okoyo is a Senior Associate with PwC Kenya’s tax practice.
