On May, 9, 2024 the Finance Bill, 2024 was published, introducing a long list of tax proposals. The Bill comes just nine months after the Finance Act, 2023 was gazetted. The 135 page document, that is the Finance Bill, 2024 touches on multiple income sources – the most hotly debated being the removal of bread from the list of zero rated products and the 2.5% annual tax on vehicles.
Beyond these two proposals, the Bill contains multiple clauses that will affect the housing and construction sectors directly and indirectly. In this article, we look at these proposals and their potential impact:
Special Economic Zones Exempt from Capital Gains Tax
The Bill proposes that investors be exempted from paying capital gains tax during the transfer of property by a licensed developer or operator within a Special Economic Zone.
Impact: This proposal serves as an incentive for investors eyeying properties in Special Economic Zones. Capital gains tax is based on value or gains made during transfer of property from one buyer to another. It one of the several hidden costs in property sales.
If this proposal is implemented, properties within Special Economic Zones will become more attractive, thus driving development in such. Note that businesses setting up shop in SEZs are already enjoying several tax benefits. In the recent past, several multinationals have moved to Tatu City, one of the most successful SEZs in Kenya. These incentives are likely to give rise to more SEZs and drive growth and development in areas outside the developed commercial zones of major cities.
Withholding Tax on Bonds
The Bill proposes to introduce withholding tax on Bonds, notes and securities with a maturity period of at least 3 years. Deductions of 5% and 15% tax will be made on interest paid to resident and non-resident persons respectively.
Impact: Financial markets have become very lucrative giving stiff competition to traditional real estate investments. Though the 5% tax may not be a significantly high amount, such deductions, coupled with inflation may affect the popularity of financial markets, and give a competitive advantage to traditional real estate investments.
Tax Deductions on Affordable Housing Contributions
The Bill recommends tax deductions on contributions made by an employee under the Affordable Housing Act. Previously, investors buying the affordable housing units were accorded a 15% relief, and first time home buyers, buying from the Affordable Housing Scheme were exempt from paying stamp duty. It seems however, the current government is scraping these incentives and replacing them with tax on the contributions they make toward Affordable Housing.
Impact: It is not clear how this proposal will be implemented but it might have a negative impact on the uptake of Affordable Units unless the government can demonstrate the incentives behind this proposal.
VAT on Construction Materials
The Bill has proposed to move certain products from the “exempt” category to “standard rated” category, meaning Value Added Tax will be charged on them if the proposal is implemented. These products cut across several industries, including bread – which has caused an uproar. Within the construction industry, taxable goods for direct and exclusive use for the construction of tourism facilities, recreational parks of fifty acres or more, convention and conference facilities will be charged VAT – upon recommendation by the Cabinet Secretary responsible for matters relating to recreational parks.
In addition, taxable goods for the direct and exclusive use in the construction and equipping of
specialized hospitals with a minimum bed capacity of fifty, will also be moved to standard rated. However, this is subject to approval by the Cabinet Secretary responsible for health who may issue guidelines for determining eligibility for exemption.
Impact: The cost of setting up hospitality and tourism facilities may go up, thus affecting the profitability of this sector of commercial real estate. Subsequently, the cost of accessing such facilities might also go up. In the long term, there might be fewer new hospitality and specialized hospital projects coming up.
Levies on Clinker, Iron Bars and Rods
There is a proposal to reduce the export and investment levy on Cement Clinkers from 17.5 % of the Customs value to 10% of the Customs value.
There is also a proposal to remove the Export and Investment Promotion Levy on bars and rods of iron or non-alloy steel, hot-rolled, in irregularly wound coils of circular cross-section measuring less than 8 mm as well as bars and rods of iron or non-alloy steel, hot-rolled, in irregularly wound coils of circular cross-section measuring less than 14mm in diameter. Currently, the levy is charged at 17.5% of the Customs Value.
Impact: This is a much welcome proposal as it might lower the overall cost of cement and iron bars and rods. Clinker is the main raw material in the cement we currently use and the cost of exporting it has affected the cost of cement significantly over the past year. Lower cement prices will definitely translate to lower cost of construction.
The Export and Investment Promotion Levy was introduced in 2023 through the Finance Act with the aim of promoting local manufacturing, while discouraging too many exports. This levy had a negative impact on commodity prices, such as cement and iron bars, which are important elements in construction.
Selling Affordable Housing Units
Previously, people buying units from Affordable Housing Schemes were not allowed to sell their units without the written consent of the Affordable Housing Board. This Bill proposes, removing this provision and making it possible to resell the units, without going through the board.
Impact: This incentive is likely to make Affordable Housing Schemes more competitive in the property market as they will be more attractive to savvy investors who want to buy for the purpose of reselling to make a profit.
Withholding Tax on Income from Digital Marketplaces
The Bill introduces a new definition for digital marketplace to mean an online or electronic platform which enables people to sell or provide goods, property or services and includes services such as ride-hailing, food delivery, freelance, professional, rental, task-based and any other service that is not exempt from tax under the Income Tax Act.
With this definition, the Bill introduces withholding tax on income earned from a digital marketplace from the making or facilitation of payments by the digital marketplace or platform. The proposed withholding tax rates are 20% and 5%, for resident and non-resident persons, respectively:
Impact: Though several Proptech models fall under the category of Digital Marketplaces, few facilitate payments within the platform – making it difficult to trace money made from the platform. The proposal places the burden of accountability on owners of such platform as they will be required to deduct and file the withholding tax, subsequently notifying the government that a user has made money from the platform. This provision is likely to affect short term rental owners using platforms such as AirBnB and the likes.
Property management platforms may also be affected as they facilitate management of rental properties through task-based features.
CREDIT: Some of the material used to compile this article was borrowed from KPMG Kenya’s analysis of the Finance Bill, 2024.
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