THIS IS WHY THE GOVERNMENT SHOULD RETHINK CAPITAL GAINS TAX

illustration of the fall in trading volumes

In January 2015, the Kenya Association of Stockbrokers and Investment Bankers (KASIB) filed a suit against the taxman asking a court order to stop the implementation of Capital Gains Tax (CGT) by the Kenya Revenue Authority citing difficulties in implementation of the levy. The brokers whose revenue is largely determined by trading volumes of financial securities also argue that Capital Gains Tax (CGT) will stall activity in the bourse.

The weight of these allegations is now being felt in the Nairobi Securities Exchange as trading volumes on the month of January 2015 went down 35% as compared to the same period in 2014. Market activity level is a key tenet of technical analysis and hence depressed activity paints a grim picture of the capital market. This negatively affects both the NSE 20-share Index (NSE20) and the NSE All Share Index (NASI).

In the same period, foreign investor inflows have plummeted by about 50% as compared to a similar period in 2014.  This is an indication of slowing foreign investor activity in the bourse. Capital gains tax deters investments by foreigners which is a blow to the economy.

Due to several of these modalities, brokers had threatened to suspend the trading of securities for a whole month beginning on 20th February 2015 to 18th March 2015 when the High Court will announce its decision on a petition filed  KASIB against KRA on its proposed implementation of CGT. Such an action could have been severely detrimental to the East Africa's leading bourse.

This is the reason why the government really needs to rethink its decision to re-introduce Capital Gains Tax (CGT) after it was dropped in the mid 1980s as a way of encouraging local and international investors. I am of the opinion that tax naturally has the effect of scaring people and the government could still achieve its planned capital markets tax revenue targets through other means other than CGT.