The taxman insists that landlords whose annual gross rental income is not more than Sh10 million will only qualify for an amnesty proposed in the Finance Bill 2015 if they fully remit levies due for last year and this year by June next year.
In the Bill, tabled before the National Assembly in June, the Kenya Revenue Authority has been barred from assessing or recovering taxes, penalties or interest accrued by the landlords up to Sh10 million annual for the financial years up to 2013.
This comes as the agency targets to increase tax compliance levels among growing individual landlords.
“The Kenya Revenue Authority wishes to notify taxpayers and the general public that the government, through the Finance Bill, 2015, has granted a tax amnesty for individual landlords on their rental income,” the authority said in a reminder to landlords last week. “The landlords applying for amnesty will be issued with amnesty certificates upon confirmation and will not be required to apply for waiver of interest and penalties.”
These landlords are under the proposed tax administration system required to pay 12 per cent of their gross rental income after Treasury Secretary Henry Rotich changed policy during his Budget Statement on June 11.
“I propose to simplify the taxation regime for landlords owning residential property by taxing their gross rental income at 12 per cent for income below Sh10 million per year,” Rotich said.
A simplified tax regime based on the flat tax rate on gross residential rental income is expected to be effected from January 1, 2016 after the passing of the Finance Bill into law.
“This tax shall be a final tax payable on a monthly basis. Taxpayers who wish to remain under the current rental income tax regime may elect to do so by writing to the commissioner (of Domestic Taxes),” the KRA maintained.
Under the previous complex tax administration regime, the KRA charged individual landlords a 10 per cent tax on the first net annual rental income of Sh121,968, 15 per cent on Sh236,880, 20 per cent on Sh351,792 while those raking in a net of Sh466,704 paid 25 per cent tax.
Any amount above this value attracted a 30 per cent tax, the same rate as that paid by companies.
The complexity of the previous system made it difficult for individual landlords to calculate the amount due to the KRA, leading to flat revenues from real estate despite a boom sparked off by rising urbanisation.
“Over the recent past, residential and rental business has witnessed substantial growth. On the contrary, rental income from the same has not grown commensurately,” said Rotich in his Budget speech.
The KRA commissioner general John Njiraini last December admitted that the system for rental income was too complex for most individual landlords to comply.
“Our studies have shown that developers, especially small investors, are experiencing difficulties in making tax declarations because of the complexities associated with calculating their costs, and they see the process as complicated and expensive,” Njiraini said. “The complexity of the system is therefore an inhibiting factor and some of them [landlords] don’t even know where to start.”
For the year 2013/14, the KRA only managed to collect Sh2.1 billion from rental income, missing its target of Sh10 billion.
KRA is targeting in the upwards of Sh3 billion by bringing on board about 20,000 of the small-scale landlords in the 2015/16 financial year ending in June next year.
The authority’s bid in the past to increase collections from the real estate sector through demand notices to landlords – and pleading with tenants to snitch on landlords – has yielded little success.
In June 2012, then Finance minister Njeru Githae in the 2012/13 Budget instructed the KRA to map out residential areas with a view to rope in landlords into the tax bracket, in what was misconceived as a new tax.
KRA was to install a Geographic Information System to profile properties and match them with owners by linking to databases of other state agencies such as the Survey department, Lands registries and utility companies like the Kenya Power and the Nairobi Water and Sewerage Company.
However, its implementation has been slowed down partly due to the sluggish process of digitising lands registries. The ministry of Land has set the end of next year as the target to have fully digitised all the 52 land registries.
Registering a property has long been a headache for developers in the lucrative building and construction sector.
In the World Bank ‘Doing Business 2015: Going Beyond Efficiency’ report published in October 2014 and based on data as of June 1, 2014, property transaction was a major cause of Kenya’s dismal ranking at 136 out of 189 countries.
Kenya is ranked number 25 in sub-Saharan Africa in completing a property transaction, worse than than all its East African Community peers.