Kenya dismisses investor worries over capital gains tax plan

NAIROBI, June 19 Wed Jun 19, 2013 10:20am BST

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NAIROBI, June 19 (Reuters) - Kenya sought to assuage concerns over a planned review of capital gains tax, saying it was too early to say what asset classes will be targeted in a measure aimed at compelling the rich to fund development.

Finance Minister Henry Rotich told lawmakers in his budget speech last week there would be a review of the tax, suspended in the 1980s, to allow the wealthy to make a token contribution to the development of the country.

Since the budget there has been speculation that the capital gains tax will affect property and gains on equity investments, but the finance ministry said plans were at an embryonic stage.

"We have not even worked out how (the tax) will be implemented, the rates or even which areas will be taxed," Geoffrey Mwau, economic secretary at the Treasury, told reporters on Wednesday, promising consultation on any measures.

Shares had dropped to a 14-week low on Tuesday as investors fretted the tax plans might sap the appeal of equities. The shilling currency came under pressure and is still at a 13-week low of 85.65/85 against the dollar, also reflecting concerns of possible damage to the economy.

One local investor said the government had to find a balance between raising funds for development projects and supporting economic growth through private investments.

PUNITIVE TAXES

"Investors are not criminals. They should be encouraged to invest more and not to have punitive taxes that punish and discourage investments, driving investments from one country to another," Chris Kirubi, who has substantial holdings in real estate and shares, told Reuters.

Mwau said the Treasury expects the plan to firm up within the next six months, but rejected concerns that a sales or value added tax (VAT) law to be tabled in parliament this year would sharply increase the price of basic items such as food.

The VAT bill will seek to erase distortions in current legislation, following years of piecemeal revisions that led to exemption of goods like rice, milk, bread and wheat. Caviar, rarely found in Kenya, is also exempt.

"VAT is not about food alone. There are a lot of products ... for the rich that are exempt at the moment," Mwau said.

Plans to issue a debut $1 billion Eurobond to fund a range of infrastructure projects, including a second port at Lamu, were on course, Mwau said.

"We plan to (launch the bond) ... in the last quarter of this calendar year. So far is it the $1 billion target for us. As much as we would like to get a bit more, we still have to worry about our external exposure," he said.

Kenya faces a large infrastructure deficit, which requires sustained expenditure of almost $4 billion per year over the next decade or about 20 percent of gross domestic product to be able to meet its infrastructure needs, the Treasury says. (Editing by Drazen Jorgic and David Holmes)

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