In October 2016, the Kenya Revenue Authority issued a notice requiring the payment of Capital Gains Tax on or before the registration of transfers in property. This notice was meant to operationalize paragraph 11A of the Eighth Schedule to the Income Tax Act which provides that Capital Gains Tax be paid on or before the application for registration of transfer at the relevant lands office. This paragraph was introduced vide the Finance Act of 2015. Previously, the tax was required to be paid on or before the 20^th of the month following the transfer.

Around 30^th January 2017, the Kenya Revenue Authority began implementing the notice. As a result, a vendor in a transaction has to pay the Capital Gains Tax on iTax before the purchaser can pay the Stamp Duty.

From a practical standpoint, the position is not favorable because it means the vendors have to pay the Capital Gains Tax out of pocket since in most cases, the purchaser has not released the balance of the purchase price. A vendor may be disadvantaged if he pays and the transaction is not concluded or the release of the purchase price stalls. If a purchaser is being financed, it is unlikely that a financier would release part of the funding to cater for the tax while a charge has not yet been registered over the property, in favour of the financier. This also means that the vendor would have to pay the Capital Gains Tax from their own funds.

The situation is made more precarious by the position on tax refunds. Section 47 of the Tax Procedures Act provides that a taxpayer who has overpaid any tax may apply for a refund within five years of making the payment. The Commissioner is required to respond to the application within ninety days and where it is approved, the refund amount shall be used in the payment of any other tax owed by the taxpayer and the remainder remitted. Therefore, a vendor who pays the Capital Gains Tax for a transaction which eventually fails may have to wait up to three months for a refund, which may not even be in cash but rather applied to other subsisting tax obligations.

In light of these challenges, the Law Society of Kenya filed a constitutional petition on 8^th February 2017, challenging the implementation of paragraph 11A as being contrary to Article 40 of the Constitution which guarantees the protection of the right to property. The application was certified as urgent by Justice John Mativo and he proceeded to issue conservatory orders barring the Kenya Revenue Authority from implementing paragraph 11A until the case is heard on 22^nd February 2017. Despite this order, the iTax system still requires payment of the Capital Gains Tax before Stamp Duty and it may take a while to be updated. It is intimated that the Kenya Revenue Authority will only suspend the application of paragraph 11A once the suit by the Law Society of Kenya is fully heard and determined.

We will continue to follow up on the events surrounding this issue and provide further information as and when it becomes available.

Please contact us at Info@cfllegal.com should you require further information.