Why rich investors are scrambling to beat the Jan 1 deadline for new tax

We learn in theory that tax avoidance is not the same thing as tax evasion and carries with it no ignominy. And also that when taxation comes into conflict with the basic forces of human nature, the taxman is engaged in a losing battle.

Indeed, the law allows every citizen to organise his activities the way he chooses to make it possible for him reduce the burden of taxation to the minimum. When citizens are faced with high taxes, they look for tax shelters.

I am not surprised that investors in both the property and capital markets sectors are employing tax avoidance tactics in the rush to beat the January 1 deadline for the introduction of the capital gains tax.

If you are observant, you will have noticed an unprecedented spike in the number of new accounts for holding stocks and shares, better known by the acronym CD accounts. Investors have opened CD accounts in large numbers.

Why do I say that it is a tax avoidance tactic? Because by opening a completely new CD account and transferring your money there, it is possible to disguise capital gains.

Similar tax avoidance tactics are being applied in the property sector, where investors have also rushed to beat the January 1 deadline by signing sales and purchase agreements in advance of the new year.

The property sector and the capital markets were among the main reasons the capital gains tax was introduced. Too much money and wealth have been flowing in these two sectors. We have seen an explosive growth in the property markets.

BIG RIDDLE

The big riddle has been that despite the explosive growth in the property sector, the number of mortgages has continued to stagnate. Tax policy experts suspect that the rich are sheltering their wealth in big property projects, hence the decision to introduce the capital gains tax.

It is an old principle in taxation: tax must follow where the money is. However, the need to cast the net as wide as possible to trap the big money being made in property and capital markets was only one of the factors.

Big Brother has also calculated that by introducing the capital gains tax, he will have opened new opportunities for mining third-party data. The calculation by the Kenya Revenue Authority (KRA) is that as it collects revenue from capital gains tax, it will now be in a better position to track transactions and follow tax cheats.

Big Brother has also calculated that by introducing the capital gains tax, he will have opened new opportunities for mining third-party data. The calculation by the Kenya Revenue Authority (KRA) is that as it collects revenue from capital gains tax, it will now be in a better position to track transactions and follow tax cheats.

Secondly, the government is in dire need of new revenue-raising measures. Indeed, As at 30 June, total revenue amounted to Sh1,001.4 billion, against a target of Sh1,060.1 billion, resulting in an underperformance of Sh58.7 billion.

The underperformance was in respect of Sh32 billion in ordinary revenue — import duties, value-added tax (VAT), income taxes, and excise duties.

There was also an underperformance of Sh52.7 billion in appropriations in aid, mainly fees and charges and revenues from loans committed by donors for specific projects.

0.2 PER CENT OF GDP

With the capital gains tax, the government is estimating that it will raise an equivalent of 0. 2 per cent of GDP in additional revenues.
Another key revenue-raising measure that the government intends to take in the new year is the new VAT withholding tax.

This tax was in existence before, but was scrapped in July 2010 on the grounds that it was worsening the problem of unhealthy accumulation of VAT refunds and arrears.

The point of departure is that while the VAT withholding tax was charged at the standard VAT level of 16 per cent at that time, it is now being introduced at 6 per cent.

The government expects to raise additional revenue equivalent to 0.3 per cent of GDP from this new tax.

We take pride that our economy did not suffer from the impact of the global financial crisis, but we now have an economy that is vulnerable to external shocks.

Kenya’s growing integration in the global markets, while creating new opportunities to borrow through sovereign bonds, has left us vulnerable to sentiment within international financial markets.

Secondly, the government is in dire need of new revenue-raising measures. Indeed, As at 30 June, total revenue amounted to Sh1,001.4 billion, against a target of Sh1,060.1 billion, resulting in an underperformance of Sh58.7 billion.

The underperformance was in respect of Sh32 billion in ordinary revenue — import duties, value-added tax (VAT), income taxes, and excise duties.

There was also an underperformance of Sh52.7 billion in appropriations in aid, mainly fees and charges and revenues from loans committed by donors for specific projects.

With the capital gains tax, the government is estimating that it will raise an equivalent of 0. 2 per cent of GDP in additional revenues.
Another key revenue-raising measure that the government intends to take in the new year is the new VAT withholding tax.

This tax was in existence before, but was scrapped in July 2010 on the grounds that it was worsening the problem of unhealthy accumulation of VAT refunds and arrears.

The point of departure is that while the VAT withholding tax was charged at the standard VAT level of 16 per cent at that time, it is now being introduced at 6 per cent.

The government expects to raise additional revenue equivalent to 0.3 per cent of GDP from this new tax.

We take pride that our economy did not suffer from the impact of the global financial crisis, but we now have an economy that is vulnerable to external shocks.

Kenya’s growing integration in the global markets, while creating new opportunities to borrow through sovereign bonds, has left us vulnerable to sentiment within international financial markets.

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