On 14th March 2017, Hon. Justice Mativo delivered a Judgement in the case of The Law Society of Kenya Vs Kenya Revenue Authority & the AG, Petition No. 39 of 2017. The issue before the court was whether capital gains tax (herein referred to as “CGT”) in respect of property is payable before the registration of transfer or upon successful transfer.
The court noted that there was a contradiction between certain provisions of the Income Tax Act.
On the one hand, Section 3.2 (f) provides that
Income upon which tax is chargeable…is income in respect of gains accruing….
And which position is emboldened under Paragraph 2 of the Eighth Schedule, which provides
The income in respect of which tax is chargeable….is the whole of a gain which accrues on transfer…of property…
On the other hand, Paragraph 11A, in direct contravention of these provisions, provides
The due date for tax payable in respect of property transferred….shall be on or before the date of application for transfer of the property…
This means on the one hand and in the same statute, we have provisions providing that the due date for payment of CGT is upon the presentation of transfer instrument to the lands office while on the other hand, we have a provision in the same schedule which provides that CGT is payable after and upon registration of the transfer instrument.
The court held that this issue has caused interpretational differences and sought to settle the matter. The court, upon applying the principles of interpretation of statute and the constitutionalism of the provisions, held as follows
- In sale Agreements, it is common knowledge that payment of the purchase price to the vendor is often, if not always, done after successful registration of the transfer to the purchaser;
- Requiring a vendor to pay CGT prior to the conclusion of a transaction and before the vendor receives the payment of the purchase price is creating an unfair tax burden on citizens;
- Further requiring the vendor to pay CGT from gains that he has not obtained and frustrating a purchaser who is willing to purchase a property but is impugned from doing so due to the inability of the vendor to pay CGT before the transfer and thus not being able to transfer the property to the purchaser is infringing the constitutional right to property
- Therefore, CGT can only be chargeable upon the accrual of a gain, and such a gain is only accrued upon the successful transfer of the property, which equates to payment of the purchase price to the vendor.
In making its orders in the petition, the court made the declaration that Paragraph 11A, which requires for the payment of CGT prior to the registration of the transfer instrument, is unconstitutional, null, and void and that the obligation of payment of CGT shall only accrue after the successful registration of the transfer instrument transferring the property to the purchaser.