Stockmarket investors in Kenya are yet to understand how a new withholding tax on share and bond trading will be collected, as there is a discrepancy between the information contained in the budget speech and the Finance Bill 2015.

Meanwhile, the Kenya Revenue Authority has ordered stockbrokers to remit capital gains tax (CGT) collected in the past six months — when a five per cent tax on profits from the sale of shares and bonds came into effect.

The mix-up is likely to hurt investor confidence and slow down activity in East Africa’s largest securities market, whose market value is estimated at Ksh2.27 trillion ($22.62 billion).

“The current legal framework requires stockbrokers to submit their returns and remit the resultant taxes to the commissioner. Such declarations relate to their volume of business within the applicable period (January to June),” Alice Owuor, Commissioner in-charge of Domestic Taxes told The EastAfrican, adding, “For any collecting agent that is yet to comply and submit returns, the authority is actively pursuing them to ensure compliance with the law.”

According to KRA, a total of Ksh600 million ($5.94 million) on capital gains taxes had been collected by the end of last week, up from Ksh381 million ($3.77 million) by mid-May. The amount also includes settlement from stockmarket intermediaries.

About half of Kenya’s 23 stockbrokers and investment banks had complied with the law, according to the KRA. 

The Kenya Association of Stockbrokers and Investment Banks (KASIB) — the lobby group for the market intermediaries — said some of its members have received demand letters to comply with the tax law.

“Some members have received tax demand letters while some have not,” said Willy Njoroge, chief executive of KASIB, “We are in the process of engaging KRA and the Capital Markets Authority to see how we are going to sort out this issue, because it relates to taxes that were there before the budget speech on June 11.”

In his budget speech on June 11, Kenya’s Cabinet Secretary for National Treasury Henry Rotich removed the five per cent tax on capital gains arising from the sale of shares and instead introduced a 0.3 per cent withholding tax on the transaction values of the shares in a bid to boost activities in the capital markets.

The Finance Bill 2015, however, proposes to amend the Income Tax Act and impose the tax on the “gains on transfer of securities listed in any securities exchange approved under the Capital Markets Act.”

As a result stockbrokers are not sure whether the fee should be imposed on the gains made from the transfer of securities or on the value of the transaction.

The Bill gives the Cabinet Secretary power to alter and introduce new taxes in a bid to raise revenues to finance government spending.

The Bill is also not clear on when the new levy should come into effect and whether the tax should be collected by the stockbrokers themselves or by the custodian banks who are said to control more than 50 per cent of the business. 

The stockbrokers are also seeking clarification as to whether unlisted, private and over-the-counter (OTC) share transfers will still be charged five per cent capital gains tax. 

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.

Kenya reintroduced capital gains tax for the first time in nearly 30 years at the rate of five cent on the sale of stocks, bonds and properties. However, its implementation has been met with resistance, with concerns that the tax could hurt the Nairobi Securities Exchange and choke the booming property market. 

READ: Falling shilling, CGT drive investors from NSE to Nigeria and Egypt

Shares listed at the Rwanda Stock Exchange and sold are exempted from tax. In Uganda, a capital gains tax of 30 per cent is applicable on business assets only.

In Tanzania, capital gains are treated as normal business income for companies and taxed at the standard corporate tax rate of 30 per cent.