Capital Gains Tax Hit Brakes On Kenyan Securities Profit Takers

Written by Kevin Mwanza

In less than a decade investors wealth at the Nairobi Securities Exchange (NSE) has grown by 220 percent to reach a capitalization of nearly $26 billion in 2014 from just $8 billion in 2006 when the rally began.

It was a smooth ride until the country’s treasury reintroduced a capital gains tax that had been withdrawn in 1975. The 5 percent tax now means Investors who have profited from the 19 IPO’s on the Kenyan exchange have to content with less gains from their stocks investments.

Both local and foreign investors will be subjected to the reintroduced tax when they sell land, buildings and marketable securities such as shares and bonds.

“This uncertainty is likely to drive many potential investors away,” NSE chairman Eddy Njoroge told Business Daily, adding that the government has done little to clarify how the tax will be collected or what the base year would be for the calculation.

Most of the nearly 2.3 million shareholders at the NSE entered the stock market through successive IPOs over the years.

Honeymoon is over

Some of the notable IPO’s that currently trade in multiples of their offer price include electricity producer KenGen, the region’s largest telecom Safaricom, Equity Bank, Cooperative Bank and the region’s largest PR & Marketing firm ScanGroup.

In December, the markets indicative NSE-20 Share index slipped below its 5,000 points mark as investors sold shares before the capital gains tax was implemented starting January 2,2015.

It now trades slightly above this support level at 5102.67 points but way below a peak of 5406.39 points it reached in September just before President Uhuru Kenyatta approved the proposed 5 percent capital gains tax.

“There are exits in fear that the capital gains tax will have an effect on their investment,” Elizabeth Ndung’u, a research analyst at Dyer & Blair, told Business Daily in December.

The taxman, Kenya Revenue Authority (KRA), has enlisted stockbrokers as collection agents for the capital gains tax, but this has not gone down well with the brokers who claims their systems are not equipped to monitor and collect the levies.

The tax agency hopes to rake in up to 7 billion shillings ($78 million) within six months from collecting this tax.

“Licensed stockbrokers shall, in respect of the sale of shares, act as collection agents and thereafter remit the tax to KRA,” the taxman said in a statement.