15th March, 2017

Dear Esteemed Client,



The Law Society of Kenya (LSK hereinafter) petitioned the constitutionality of paragraph 11A, Eighth Schedule of the Income Tax Act in High Court Petition No. 39 of 2017. This was on the basis that the Section was inconsistent with other provisions in the same Act and various provisions in the Constitution of Kenya. The ruling was delivered on 14th of March 2017.


It should be noted that the LSK’s petition was not in opposition to the payment of capital gains tax but instead sought to challenge paragraph 11a which makes capital gains tax ‘payable upon presentation of the transfer instrument’.


Paragraph 11A as introduced by the Finance Act, 2015 amended the Eighth Schedule of the Income Tax to read in part:-


…..The due date for tax payable in respect of property transferred under this Part shall be on or before the date of application for the transfer of the property made at the relevant Lands Office


The LSK argued that the way the Kenya Revenue Authority has been implementing this provision is not consistent with Paragraph 2 which provides that the tax is chargeable on the transfer of the property. Paragraph 6 further describes the transfer of property to include where a property is sold, exchanged, conveyed or disposed in any manner.


LSK further argued that Paragraph 11A imposes a requirement that the tax is to be paid ‘before the property is transferred’ which contradicts various statutes including the constitutional right to enjoyment and alienation of a property. The action of collecting capital gains tax upfront presupposes that the property has been transferred which may not be the case, up until registration is successfully effected. The LSK argued that no capital gain accrues at the time of transfer and as such the requirement that tax be paid on anticipated gain unfairly imposes a tax burden on the vendor.


In response, The Kenya Revenue Authority argued that their collection of such tax before presentation of an application for transfer of the property was in order and that due to the ambiguity in the previous provisions Paragraph 11A was introduced to clarify the due date of the tax.  They submitted that accounting standards recognize revenue when it is earned and not when received the same, hence the collection at the point of application for registration.


The Honorable Judge identified two main issues for determination

  1. Whether or not paragraph 11A of the schedule is vague, contradicts the other provisions and whether it is unconstitutional;
  2. When does liability to pay CGT accrue?

The Honorable Judge acknowledged that there are numerous rules of interpreting a statute but highlighted that the plain language of the statute is the most important. In the absence of an expressed legislative intention to the contrary, the language must ordinarily be taken as conclusive. It is not the duty of the court to enlarge the scope of the legislation or the intention of the legislature when the language of the provision is plain and unambiguous. When the words of the statute are plain, precise and unambiguous, the intention of the legislature is to be gathered from the language of the statute itself and no external aid is admissible to construe those words.


The court relied on the definition of a transfer as provided in the Land Registration Act where the transfer or a property is completed by registration of the transferee as proprietor of the land. It noted that there was an inconsistency with Paragraph 11 A and the earlier provisions and determined that accrual of gains happens after disposal of a property. The learned Judge declared that paragraph 11 A was void for want of legal certainty and went on to rule that requirement for payment of CGT before registration of the transfer essentially means that tax is payable before the prerequisites are met hence creating an unfair tax burden.


The court further ruled that the collection of the capital gains tax before successful registration of the transfer is unconstitutional as agreements to sell provide that payment of the purchase price is made upon successful registration of the transfer and the demand for tax before a vendor has been put in funds infringes upon vendor’s right to property.

The court did finally find that Paragraph 11 A is inconsistent with other provisions of the Income Tax Act, that the same paragraph is inconsistent with the Constitution of Kenya in that it imposes an unfair tax burden on the public by being levied on or before the transfer instead of upon registration of the transfer.


A copy of the full judgment can be availed to you if required.





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