An aerial view of houses in Kibagabaga neighbourhood. (Timothy Kisambira)
Government decision to drop plans to levy 5 per cent income tax on the value of sale or free transfer of immovable property such as houses and land is a welcome move for Rwanda’s estate development, home owners said.
The proposal had ignited a lengthy debate as lawmakers in the parliamentary standing Committee on National Budget and Patrimony examined a draft law governing income tax, which is set to replace Law no16/2005 of 18/08/2005 on direct income taxes if passed by Parliament.
As all MPs in the Lower House start passing the bill on Wednesday, they will be doing away with the proposal whose implications would have been a burden to homeowners and discourage new buyers from entering low cost property market.
Both the Minister of State in charge of Economic Planning, Dr Uzziel Ndagijimana, and the Chairperson of the parliamentary Committee on Budget and National Patrimony, MP Constance Mukayuhi Rwaka, confirmed the removal of the provision in an interview with The New Times.
“The daft law is still under discussion in parliamentary standing committee but the 5 per cent was removed completely from the draft,” Ndagijimana said.
Under the current income tax law, the sale or free transfer of immovable properties owned by companies is taxed but the levies are not applied when the property is owned by an individual.
The proposed income tax law had sought to impose a tax on the sale or free transfer of immovable property if it’s of high value in line with the threshold that was going to be decided by the ministry in charge of infrastructure.
As discussions went on in Parliament over the last two years, the government had proposed the threshold of Rwf30 million as a price above which individual’s homes could be eligible to pay the 5 per cent tax levy if sold.
But legislators didn’t endorse the proposal as they described it as a burden for low income citizens who already pay taxes in different ways and may not necessarily sell their homes for the purpose of making extra money.
MP Mukayuhi said that the proposal was taken from the bill because it would have been a burden to citizens who are already paying taxes at different levels.
“For those who are officially in business they can continue to pay their normal income taxes but for ordinary citizens they will be selling off their property and won’t be taxed unless they are in business,” she said in an interview on Wednesday as she prepared to present her committee’s analysis to the House.
MP Annonciata Mukarugwiza, Deputy Chairperson of the committee, said the proposal was struck off because it’s just too early for people to understand the idea.
“Right now people don’t understand the concept. So, it has been ditched for now,” she said.
Tax experts had warned in several interviews with The New Times that charging 5 per cent on sale or free transfer of immovable property would be a burden to homeowners and may discourage new buyers from entering low cost property market.
Paul Mugambwa, an Associate Tax Director with PriceWaterHouseCoopers (PwC) Rwanda, argued that it was wrong for RRA to call the proposed levy a “capital gains tax” yet it proposes to levy it on sale price.
“Capital gains tax is not computed this way. Instead, the capital gains must first be determined,” he said last November.
The expert explained that the government needed to consider that some people live in the country and own homes for the purpose of residence and may not necessarily be making money and hence have no gains to make.
Angello Musinguzi, Senior Manager for Tax Services at KPMG Rwanda, had also challenged the notion explaining that that kind of tax was normally not based on sales value but computed gains.
He had advised that the proposed tax be called a sales tax or be given another name because it was going to fall short of definition of capital gains tax as some homeowners even incur a loss in the process of sale due to several reasons, such as expropriation and moving to other places.
Reactions to move
Charles Haba, a real estate broker said:
“It’s a very good move. The proposal was a deterrent towards property exchanging hands. Everybody makes money every time a home is sold and it should be encouraged as much as possible instead of being discouraged,” he said.
Francis Kibogo, homeowner said:
“It’s good because if you sell your home to sort a bank loan or because you are poor and the government follows you up to claim a tax it wouldn’t be fair,” he said.
Jean Nsabimana, real estate developer:
“The challenge will continue to be there on how to distinguish between those who build to sell and those who build to occupy their homes. Those who officially build to sell and declare income will continue to pay taxes while individuals who make money while they sell one home at a time may continue to make profits without paying taxes,” he said.