The Kenya Treasury Cabinet Secretary presented the Finance Bill, 2023 (the Bill) to Parliament on April 28, 2023. Before the Bill becomes law, Parliament may solicit stakeholder and public input. The Bill aims to amend various tax and duty laws in order to increase government revenue from taxes collected.
As reported by Habitat For Humanity, Kenya’s current housing demand is 250,000 units per year, with less than 50,000 units delivered each year.
To address the shortcoming, the government formally launched an Affordable Housing Program in December 2017, with the intention of delivering 500,000 units by December 2022, at prices ranging from Kshs 1 million to Kshs 3 million for one to three bedroom units, respectively. Since then, major achievements have been reached.
However, since its debut, the housing initiative has struggled to reach its full potential. This is primarily due to financial constraints caused by insufficient budgeting, which has resulted in the stalling of various projects, combined with an overly ambitious target.
For instance, in the FY ‘2022/23 Budget, the Affordable Housing Program was allocated Kshs 27.7 bn ($202.5 mn), whereas a minimum of Kshs 416 bn ($3bn) is required to meet the government’s target of 250k homes p.a built, assuming a minimum unit size of 40 sqm, construction cost of Kshs 41,600 ($304) per sqm and a minimum house price amounting to Kshs 1.7 mn ($12,427). As a result, budgetary provisions only cover 7% of the target.
The key changes proposed in the Bill, which is currently being debated in the National Assembly, are outlined below.
National Housing Development Fund
To fund Kenya’s affordable housing initiative, a 3% monthly basic salary contribution to the National Housing Development Fund (NHDF) was proposed. According to the bill, the employer will pay 3.0% of the contribution, while the employee will pay the remaining 3.0%.
Rental income from residence
The Bill proposes to reduce the tax rate on residential rental income from 10% to 7.5% of a taxable resident person’s gross rental receipts.
Rental income is taxable as withholding tax.
The Bill proposes that anyone receiving rental income on behalf of the owner deduct and remit WHT to the Commissioner within 24 hours of deduction if the Commissioner has appointed the person in writing as agent.
The withholder must also provide the Commissioner with a written return detailing the tax deducted and any other information the Commissioner may require. Furthermore, the Commissioner is required to provide the owner of the rental income with a certificate detailing the amount of rent and the tax deducted from it.
This change is intended to reduce landlord tax evasion while also increasing revenue collection from rental income.
Capital gains taxation
The following changes to capital gains tax are proposed in the Bill:
The Bill proposes to impose capital gains tax when a property is transferred in a non-taxable transaction and then transferred in a taxable transaction within less than 5 years. The subsequent transfer’s adjusted cost will be calculated using the original adjusted cost from the first transfer.
The Bill also sought to limit the existing capital gains tax exemption for internal group restructurings that do not involve a transfer to a third party by proposing that the group be in presence for at least 24 months to qualify for the exemption.
The Bill proposes that capital gains tax be due and payable on the earlier of (i) the vendor receiving the full purchase price or (ii) the transfer being registered.
Is this a good initiative to help reduce the current housing shortage? Will it be successful, and if so, at what cost? Given the foregoing, implementing the funding initiative may prove difficult for both the government and citizens.
Some may argue that the government should focus on other ways of funding and implementing the housing program, such as collaborating with and utilizing private sector developers, as well as creating a favorable environment for the operation and development of Real Estate Investment Trusts in the country.
In any case, the government is looking for new avenues for the betterment of an industry that has contributed to 20% of the country’s GDP. Tell us what you think about the finance bill of 2023.
f you’re considering investing in real estate, you should arm yourself with enough information to weigh your options carefully.