Tax fears spark panic sales in stock market

 Fears sparked by capital gain tax, a new levy which comes into effect on January 1, pushed trading at the Nairobi Securities Exchange to a five-month low.

The NSE 20 Share Index, an indicator of overall market outlook, declined to a new low at close of trading on Friday.

“There have been a lot of sales on fears of the effect of the capital gains tax,” Faida Investment Bank chief executive, who is also the NSE vice-chairman, Mr Bob Karina, told the Nation.
Bonds and shares

Mr Karina cited uncertainty in the market on whether or not the tax will be slapped on securities. Investors are also unsure on how the tax will be implemented.

In August, Kenya introduced a five per cent capital gains tax on one’s net gains accruing from transactions in property and securities such as bonds and shares. The levy will be applied from January 1.

Some experts have previously said that while the reintroduction of capital gains tax will boost government revenue, the plan should be implemented progressively starting with land and property. The market requires time to attract more listings and capitalisation, they argue.

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“We can first start with land and buildings before bringing shares into the tax much later. This is because our market is not as developed as in other countries such as South Africa. Once the NSE becomes more active and many companies are listed, then the tax on shares can be introduced,” Mr Parag Shah, a partner at Grant Thornton, a tax and audit firm, said.

Capital gains tax, a 30 per cent charge on shares and property in Kenya, was abolished in 1985 to encourage investment in the two segments.

For the second consecutive week, the NSE 20 Share Index shed 4.2 per cent, touching a five-month low of 4,910.1 points due to investor exit.

“At $8.8 million (about Sh792 million), foreign net outflows were the highest in 10 months,” Sterling Capital said in its weekly report on Friday. Increased foreign outflows are also blamed on a weakening shilling to 90 units against the greenback.

Equity turnover soared 111 per cent to Sh8.4 billion last week from Sh3.99 billion a week earlier.

Foreign investor participation decreased to 38.4 per cent compared to 67 per cent a week earlier.

According to the managing director at Standard and Mutual, Mr Cliff Otega, many investors are selling off their shares in order to reduce their risk exposure ahead of the implementation of capital gains tax.