Capital gains tax choking African stockmarkets, experts now warn

Saturday November 29 2014

Trading at the Nairobi Securities Exchange. Economists have warned that imposing capital gains tax on securities will choke Africa’s stockmarkets. PHOTO | FILE

The capital gains tax imposed by governments across Africa has been identified by experts as one of the obstacles to growth of the equities, debt and real estate sectors as Kenya prepares to start charging a 5 per cent levy on asset transactions in January.

The tax could undermine Kenya’s bid to become an international financial centre, with Mauritius, one of its rivals for the position, disclosing that it had avoided the CGT on stocks deals in order to deepen capital markets and pooling of resources for development.

Kenya has reintroduced capital gains tax at the rate of 5 per cent on securities transactions with effect from January 1. Tanzania charges CGT at 20 per cent for foreign-owned firms and 10 per cent for residents while Uganda charges 30 per cent.

The enforcement of CGT in Kenya has met with resistance, with concerns that the tax could hurt the Nairobi Securities Exchange and choke the flourishing property market.

“Capital markets stakeholders have repeatedly appealed to the government to defer the introduction of CGT on securities transactions to enable the capital markets to grow,” said NSE chairman Eddy Njoroge.

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Sunil Benimadhu, chief executive of the Stock Exchange of Mauritius and outgoing president of the African Securities Exchanges Association (Asea), said his country has avoided charging capital gains tax on stock exchange transactions in order to position itself as an international financial centre.

Kenya intends to charge five per cent of any income from the sale of property — defined as both moveable (land and buildings) and liquid (shares and other instruments of value).

The levy will apply on the net gain from the sale, which means sellers will be allowed to deduct the acquisition, maintenance and improvement costs on the property as well as service fees for the transaction.

Kenyan Deputy President William Ruto, who opened the 18th annual Asea Conference, which concluded last week in Diani at the Kenyan Coast, assured players that the government is still open to discussions.

The more than 300 delegates discussed the obstacles hindering the growth of securities markets and how African bourses can be used to support the continent’s economic growth.

The International Monetary Fund has forecast that the sub-Saharan African economy will grow by 5.1 per cent this year, and 5.8 per cent in 2015.

The World Bank, on the other hand, says growth in the region will remain flat at around 4.7 per cent, mainly due to weaknesses in South Africa and oil infrastructure bottlenecks in Angola. 

READ: World Bank report says East Africa economic growth strong

Economic activity was robust in much of sub-Saharan Africa in 2013 with GDP growth in the region strengthening to 4.7 per cent in 2013, up from 3.7 per cent in 2012, supported by robust investment in the resource sectors and public infrastructure.

The capital markets are expected to promote growth by mobilising domestic savings and investments.

It is argued that well-established capital markets can help African countries cushion their economies from external shocks by mobilising funds through instruments such as bonds and reducing currency and duration mismatches.

Bourses can also help foster regional integration by allowing cross-border capital raising initiatives such as public offerings, bond issues and cross-listing of stocks.

The IMF has repeatedly called for increased harmonisation of Africa’s equity and bond markets as a way of promoting economic integration and enhancing access.

The Fund has urged regional trade blocs such as the East African Community, the Economic Community of West African States and the Southern African Development Community to integrate their capital markets.

“By making trade blocs a free capital markets zone, the member countries and investors will benefit from a larger pool of savings, diversify risks, enhance competition and innovation across financial institutions, and offer wider choices to regional and foreign investors,” said Mr Ruto.

There have also been increased efforts to harmonise rules, technology and systems across the multiple trading blocs in Africa to encourage cross-listing of securities.

Uganda’s utility Umeme’s initial public offering was listed on both the Kampala and Nairobi bourses, demonstrating the power of regional capital markets to pool funds and broaden ownership of firms.

Increased cross-border listing of stocks also makes it easy to access shares primarily trading in a different bourse by boosting supply and liquidity.

“Our consensus is that investments are the fuel needed to power Africa’s takeoff. The private sector is the formidable engine to drive our transformation. The securities exchanges are our vehicle of delivering Africa’s collective dream,” said Mr Ruto.

“These investments can only happen in the presence of sufficient resources by way of capital to enable governments and businesses fund growth and expansion. We look to the capital markets as the best forum for the mobilisation of savings and investments, which give our economies strength to grow and resilience to withstand external shocks.”

Strong capital markets reduce economic vulnerability, providing people and businesses with the ideal space to trade, innovate, manufacture and manage.

“The resources mobilised through the securities exchanges are the fuel reserves that enable us as drivers to estimate our journey,” said Mr Ruto.