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Advance collection of capital gains tax in Kenya declared unconstitutional
July 04 2017 0 comment

Advance collection of capital gains tax in Kenya declared unconstitutional

Advance collection of capital gains tax in Kenya declared unconstitutional.

By the Africa Legal Consulting Team


“The subject is not taxable by inference or by analogy but only by plain words of a statute applicable to the facts and circumstances of the case. As I understand the principle of fiscal legislation it is this, if the person sought comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot, bring the subject within the letter of the law, the subject is free however apparently within the spirit of the law the case ought otherwise appears to be. “The subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”

Nyamu JA, Keroche Industries Limited V Kenya Revenue Authority & 5 Others [2007] e KLR, quoting with approval Russell v Scott [1948] 2 ALL ER 5 and Partington v Attorney General [1869] 4HL 100

 The import of the above locus classicus is out rightly clear; that a tax burden imposed on any subject must be pursuant to the clear and unambiguous provisions of a statute. Where the tax assessed has no basis in law, then the obligation to pay such tax is non-existent. When there are conflicting provisions relating to tax in two or more statutes, then it is prudent to approach the courts for an interpretation of the conflicting provisions as the courts are the ultimate custodians of the law.

The latter formed the main grounds under which Petition No. 39 0f 2017, The Law Society of Kenya v Kenya Revenue Authority & The Attorney General was brought before the High Court. The Petitioners challenged the provisions of Paragraph 11A of the 8th Schedule of the Income Tax Act on grounds that it is inconsistent with paragraph 2 of the schedule as read with paragraph 6(1)(a) of the schedule. Further, they prayed for a declaration of unconstitutionality on grounds that the said provision violates Articles 10, 40 and 201 of the constitution. The category of tax payable under the 8th Schedule is the capital gains tax.

The relevant provisions in the sections of the Income Tax Act provide as follows:

Paragraph 11A of the 8th Schedule, “The due date for tax payable in respect of property transferred under this Part shall be on or before the date of application for transfer of the property is made at the relevant Lands Office”

Paragraph 2 of the 8th Schedule, “Subject to this Schedule, income in respect of which tax is chargeable under section 3(2)(f) is the whole of a gain which accrues to a company or an individual on or after lst January, 2015 on the transfer of property situated in Kenya…”

Below is a brief history of capital gains tax in Kenya.

Capital gains tax is the tax charged upon the profits accruing from the transfer of real property in Kenya by any juristic person. In Kenya, it was introduced in 1975 via the Income Tax Act under the 8th Schedule, payable at a rate of 10% but this was suspended in 1985. Attempts to re-introduce this tax in 2006 failed as the bill lacked the necessary approval in parliament. However, in 2014, the same was successfully re-introduced by the Finance Act, 2015 in a bid to increase the government’s revenue base. However, the rate was reduced to 5% by this act but this was not reflected as an amendment under the Income Tax Act. Further, the Act has a retrospective application to property acquired before the enactment of the Act

The conflicting provisions and unconstitutionality of Paragraph 11A of the 8th Schedule

The conflict in the above provisions arises from the fact that under Paragraph 2, the tax shall accrue upon successful transfer whereas Paragraph 8 imposes the tax obligation before transfer of the property. Under Paragraph 4 of the schedule, the gain realized upon transfer of property is deemed to be realized at the time of transfer. The petitioners submitted that Paragraph 8 violates the provisions of Article 40(2)(a) of the constitution which guarantees the right to property. The requirement to pay the tax before transfer of property and receipt of the purchase price limits the vendor’s right to transfer the property where he/she doesn’t have the money to pay the tax in advance and this further limits the buyer’s right to acquire property. Further, the petitioners submitted that imposition of taxes on a gain that is yet to accrue imposed an unfair tax burden contrary to Article 201(b)(i) of the Constitution.

The Respondents asserted that collection of taxes was a mandate given to them by statute and sought to distinguish the two contradicting provisions. They relied on the provisions of Article 209 of the constitution which empowers the National government to impose taxes which are then collected by the 1st Respondent. The 2nd Respondent submitted that the petition failed to disclose any violation of the petitioner’s rights. The Respondents urged the court to apply the objects and purposes of the statute while determining its constitutionality and noted that every statute is deemed to be constitutional and the burden of proving unconstitutionality is on the party alleging so.

When does Capital Gains Tax Accrue?

Under Section 3(2)(f) of the Income Tax Act, capital gains tax is chargeable as income in respect of gains accruing on the transfer of property situated in Kenya. Therefore, the gains only accrue on transfer and consequently, so should any tax charged on such gains. The issue that arises therefore is when transfer of property takes place. To answer this, the court relied on the provisions of the Land Registration Act.

This Act defines a transfer as passing of an estate or interest in land or lease for a consideration or otherwise which, under Section 32 is completed by filing the instrument and subsequent registration of the transferee as the proprietor. Therefore, seeking to have capital gains fall due before actual transfer of property is effected contradicts the provisions of the Land Registration Act. It further offends the provisions of Paragraph 6 of the 8th Schedule of the Income Tax Act which outlines circumstances when transfer of property occurs as follows to include: “where property is sold, exchanged, conveyed or otherwise disposed of in any manner whatever (including by way of gift), whether or not for consideration.”

Therefore, capital gains tax does not accrue upon agreement to sell but upon the conclusion of the entire conveyancing process when the following conditions are met;

a. The disposal of an asset- This could be through any of the ways contemplated under Paragraph 6 of the 8th Schedule and includes sale, exchange or a gift.

b. The accrual from that disposal of a chargeable gain- Capital gains tax is charged on the profits only i.e. on the amount by which the transfer value of the property exceeds the buying price of the property. Therefore, where no gains are realized upon transfer, capital gains tax will not fall due.

c. The accrual of that gain to a person chargeable to capital gains tax- In some instances, this tax will not fall due even though there has been transfer of property. For instance, under Paragraph 6 of the 8th Schedule of the Income Tax Act, transfer of assets between spouses and immediate family members is not chargeable. Therefore, a father who transfers property to his son is not a person chargeable to capital gains tax under the Act.

When the above pre-requisites have not been met, the court held that the liability to pay capital gains tax does not accrue. Further, the court held that the provisions of Paragraph 11A contradicted the provisions of Paragraph 2 and Paragraph 6 of the 8th Schedule and therefore failed the constitutionality test of rationality and proportionality. As regards the imposition of an unfair tax burden, the court held that Paragraph 11A imposed an unfair tax burden contrary to Article 202 of the Constitution to the extent that it imposes an obligation to pay capital gains tax on or before presenting the transfer instrument instead of upon registration of the instrument.


The court suspended advance collection of capital gains tax by KRA. The tax only falls due upon successful transfer of property. This upholds the right to property under Article 40 of the constitution as vendors will be able to dispose their property, even where they cannot afford to pay the capital gains tax upfront.

In case you need more information or advice on the above changes, please contact the Africa Legal Consulting team on This email address is being protected from spambots. You need JavaScript enabled to view it.

You can also read more on capital gains tax via this link http://www.africalegalconsult.com/blog-current/item/65-reasons-why-capital-gains-enjoy-low-tax-rates.html

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