On 14th March 2017, the Constitutional & Human Rights Division of the High Court of Kenya held that the requirement under the Income Tax Act to pay capital gains tax prior to application for registration of transfer of a property at the Land Office is unconstitutional.

This decision was made in Constitutional Petition Number 39 of 2017: The Law Society of Kenya v The Kenya Revenue Authority & the Attorney General filed by the LSK to challenge the constitutionality of paragraph 11A of the Eighth Schedule to the Income Tax Act which provides that CGT is payable on or before the date the application for transfer of property is made at the relevant Lands Office.

The court held that paragraph 11A is unconstitutional for the reasons that:

(i)It is inconsistent with other provisions of the Eighth Schedule of the Income Tax Act which provide that CGT is payable on transfer;

(ii)The provision effectively deprives the public of the right over their property; and

(iii)It unfairly imposes a tax burden by requiring a taxpayer to pay CGT on or before presenting the transfer instrument for registration instead of upon registration of the transfer instrument in favor of the transferee.

The effect of this ruling, unless stayed or overturned on appeal, is that the KRA cannot demand payment of CGT before registration of the transfer in favor of the transferee.

The KRA has the right to challenge this decision in the Court of Appeal. We shall provide a further update in case of any significant developments in the matter.