The Constitutional Division of the High Court has on the 14th March, 2017 declared that Paragraph 11A of the Eighth Schedule of the Income Tax Act, which provided for the payment of Capital Gains Tax before registration of a transfer instrument, is unconstitutional.
Previously, the Kenya Revenue Authority (KRA) had issued a notice in October 2016 introducing a twinning of the stamp duty and the capital gains tax to give effect to Paragraph 11A. Under the twinning system, upon logging into the iTax portal, a purchaser would not be able to pay stamp duty before the vendor had paid capital gains tax, owing to the fact that an acknowledgement number for the payment of the capital gains tax was a pre-requisite for paying stamp duty.
This system was challenged by Law Society of Kenya (LSK) through Petition Number 39 of 2017. The court in delivering its judgment on this Petition stated that the provisions of Paragraph 11A of the Eighth Schedule of the Income Tax Act were vague, lacked legal certainty and were inconsistent with Paragraphs 2 and 6(1)(a) of the said Act which provides for accrual of tax only upon successful passing of title by registration.
The court further found that Paragraph 11A violated the provisions of Article 40(2)(a) of the Constitution of Kenya which guarantees rights over property since a vendor would be required to pay capital gains tax before receiving the actual gain, a fact that may hinder property transactions where such vendor is unable to fund the amounts demanded as capital gains tax.
Finally, the court faulted Paragraph 11A and declared it unconstitutional for unfairly imposing a tax burden contrary to Article 201 (b) of the Constitution by demanding that capital gains be paid before presenting the transfer instrument for registration as opposed to upon registration of the transfer instrument.
We are keen to observe KRA’s implementation of the orders arising from this judgment should an appeal not be preferred, with concern indicated on the potentially steep costs of redesigning the iTax portal to conform to the orders of the High Court.
Please contact us at Info@cfllegal.com should you require further information.
