Kenya will more than double its capital gains tax rate to 12.5% from 5% to bring it in line with international standards, Finance Minister Henry Rotich said in budget proposals to parliament on Thursday. The East African economy is one of the fastest growing in the region, expanding by 6.3% in 2018 on the back of a good harvest in a country where farming makes up about a third of output. However, investors have been unnerved by a jump in government debt in recent years, to more than 55% of GDP from 42% in 2013.
"There is a need to review the capital gains tax legislation in order to enhance equity and fairness as well as harmonize the rate with other jurisdictions," the minister said. "Consequently, I propose to increase the rate of capital gains tax from 5% to 12.5%." He said some countries, including in East Africa, had much higher rates of 20-30%.
Rotich also made another proposal to remove a cap on commercial lending rates, after legislators thwarted his attempt last year. The cap had not lived up to the expectation of reducing lending costs and increasing access to credit, he said, adding the law had resulted in the opposite effect, starving small businesses of much-needed credit as banks declined any potentially risky loans.
"Conscious of the need to spur business activity, I will in this year's finance bill be proposing the repeal of section 33b (rate cap) of the banking act 2016, I am convinced this will unlock credit to the private sector," he said. The government will cut its budget deficit in the 2019/20 financial year to 5.6% of GDP from 7.4% in the current fiscal year, which ends this month, Rotich said.
The funding gap will be filled by net local borrowing of 283.5 billion shillings ($2.79 billion) and 324 billion shillings in net external borrowing, Rotich said. "Our economy continues to be resilient in the midst of significant global and domestic elements. In 2018 our economy grew by 6.3%, up from 4.9% in the previous year," the minister said. "We project growth in 2019 to remain strong at around the same level in 2018."
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