KRA sets its sights on landlords - Daily Nation

KRA sets its sights on landlords to grow tax streams

Monday May 28 2012

Taxman to deploy a system that maps out houses and those coming up to ensure that landlords pay their dues to the authority

Taxman to deploy a system that maps out houses and those coming up to ensure that landlords pay their dues to the authority. 

By PAUL WAFULA [email protected]

The big smile on the faces of landlords on rent collecting missions may soon be wiped off when the taxman comes for his dues.

Property developers and owners should brace themselves for leaner times now that the boom in the sector has finally caught the Kenya Revenue Authority’s eye.

KRA is in the process of deploying a system to help it identify landlords who are not paying taxes as it moves to net stakeholders in the real estate market.

The system, to be known as the Geospatial Revenue Collection Information System (GEOCRIS), will also map out new developments coming up across the country as potential tax targets.

Available data on the value of new building plans approved between 2001 and June last year shows that their value rose from Sh4 billion to an annualised level of Sh198 billion.

However, the contribution of the sector to the tax kitty has remained largely flat. “The property market has been booming over the past decade and we are now ready to pursue it very aggressively, going forward. We have developed the necessary tools and structures to make it happen,” KRA spokesman Kennedy Onyonyi told Smart Company.

And it is not just the new system. The taxman has also partnered with utility companies such as Kenya Power and water firms to help it track properties eligible to pay tax.

For instance, the more the electric connections or water meters, the higher the chance that the property is a residential unit.

“If a property has about 20 electricity meters, then the property owner is likely to be a landlord. The property owners or developers are usually the people whose names appear as the first applicants for utilities,” said Mr Onyonyi.

In cases where the sale of the property from the developer to a buyer is complete and the developer is out of the picture, KRA will use Kenya Power’s data to help it establish the previous owners and work forward to establish the new owners. 

This means that the taxman will be looking to establish who applies for water as well as electricity as potential clients. The taxman may also interview contractors, architects, surveyors, marketing agents, and land sellers to provide verification of costs for tax computation purposes.

KRA will also be counting on the Commissioner of Lands to support its quest of netting landlords and change in ownership of parcels of land in getting hold of those who have sold property.

The revenue authority is targeting both income from rentals and sale businesses as it moves to ensure that all sectors are covered.

According to conservative estimates by the taxman, the City Council of Nairobi had a tax potential of Sh3.4 billion in 2007. This has grown to over Sh10 billion a year in Nairobi alone.

According to the estimates, the sector enjoys profit margins of at least 20 per cent. It is looking at a tax rate of 30 per cent from proceeds earned from property deals. This computation is based on the value of buildings approved by the council alone.

If other parts of the country are brought on board, the revenue authority could be staring at a gold mine. However, KRA’s grand plan for the implementation of property tax may meet stiff resistance from the counties given that the Constitution has handed the sector to devolved governments.

County governments will prescribe how much tax properties in their jurisdiction will attract. The taxman is aware that the sector is worth a fortune, given the fact that the values submitted to the City Council of Nairobi are often undervalued since stamp duty is based on value-addition.

Also, not all structures have their plans submitted to City Hall for approval. In the past two years, for instance, land prices in prime sections of Nairobi and the surrounding districts have more than doubled owing to increased demand by real estate investors racing to cash in on the booming property market.

For example, an eighth of an acre now costs an average Sh1.6 million, up from Sh700,000 in December 2009. And at least 40,000 housing units for sale are completed every year. 

The current law prohibits charging VAT on the sale of a house, taking into account the fact that many tax inputs are incurred in the purchase of materials used in construction.

It has divided property developers into those who set up land and buildings for sell and those who develop them and become landlords. Profit from buying and selling property can arise from capital gains where no development is done but the transaction results in a profit.

KRA will also tax property developers who dispose of their developments on the basis of added value. But it is not clear how the authorities will deal with property developers who work on projects, then vanish once the property is completed or wind up the company altogether.

However, KRA said that it was confident that through its partnership with other government agencies, it would bring all such entities under its radar.

“We may cooperate with the other authorities, including county councils, so that paying taxes will be part of the approval process before the property is certified as completed or given approval to start construction,” KRA said.

For briefcase companies that sell and disappear, KRA may resort to using the property as security for taxes not paid. In the case of landlords, KRA is developing a method to effectively recruit new emerging landlords and a basis for identifying those already in existence.

“We have set up a project management team to spearhead the project to be supervised by at least four commissioners, including the medium and small taxpayers’ commissioner, large taxpayers’ commissioner, as well as investigation and enforcement commissioner,” said Mr Onyonyi.

The revenue authority’s plans are the latest in efforts to net more taxpayers and meet its obligation of collecting more revenue to fund the devolved governments.

Revenue authorities usually focus on the formal sector, which is easier to tax, encouraging taxpayers to move there and the amorphous property market to avoid the taxman.

As more taxpayers escape the net, they leave the burden of financing the national budget to the few in formal employment.