Tax on real estate can spur development

Reference is made to an article in the Daily Monitor of  June 28, 2021 in which Mr John Musinguzi, the Uganda Revenue Authority’s Commissioner General, was clarifying on an article by Mr Andrew Mwenda, about the worsening of Uganda’s tax policies towards real estate. 

 Mr Mwenda gave an example of how his friend demolished his house and sold off an empty piece of land to avoid capital gains tax (CGT). Both articles merit deeper thought because of the broad economic implication of the said tax.    

Capital gains taxes on immovable property are levied on the seller of the property after disposing it off. It is computed by offsetting the cost base (amount paid to acquire the property plus incidental capital expenditures), from the monetary consideration received. Surprisingly though, many people become aware of this tax only after the sale, often a little late. 

There are arguments for and against this tax, the opponents arguing that its negative economic outcomes collectively outweigh the revenue it generates. This commentary is to broaden the readers’ view about the positive benefits of capital gains tax. 

Capital gains tax is fundamentally fair, equitable, and progressive as it is generally levied upon the high net-worth individuals. It would be profoundly unfair to give preferential tax treatment to people earning capital income, while wages and corporate income earners carry the burden. 

Further, failure to tax these gains would discriminate in favour of property owners by way of encouraging reinvestment of these gains in assets which would perpetuate severe inequalities in income and wealth. 

In the absence of CGT, a lot of investment in real estate becomes speculative and may create a bubble and turbulence in the market. CGT tax therefore plays a role in curbing this speculation as well as propelling the market into self-correction and efficiency, as it reduces the entry of speculative investors by moderating the expectation of profiting from flipping properties. 

The other justification for CGT is the un-earned increment of value on the property. Increases in land value are not as a result of the deliberate effort or skill of owners, but as an outcome of public social-economic factors like road infrastructure. Therefore, the gains arising from projects created by the community need to be taxed for the benefit of the said community.

The other economic benefit of capital gains tax is that when capital gains are subjected to tax equivalent to other forms of taxable income, it facilitates and encourages entrepreneurial investment in manufacturing and service innovation ventures, as opposed to venturing into low-yielding fixed assets which cannot build a robust foundation for national economic success, in this commercially competitive global village. CGT, therefore, results in the proficient allocation of investment capital.  

There is an argument that CGT can discourage investment in housing, but this view is unsubstantiated since Uganda does not levy taxes on capital gains on primary residences.  Indexation is also proposed by those who opine that if the appreciation of the property value is due to inflation, overall capital gains would be misleading. Factual as this is, it is equally true of all elements of the income tax system, not just capital gains. 

More so capital gains are taxed only when an appreciated asset is sold, therefore those who realise capital gains already enjoy a significant tax concession in terms of tax deferral.
 It makes no sense to compound this concession with a further selective allowance in the form of indexation.

Conclusively, strengthening capital gains tax administration lessens tax disparities, reduces inequality, and increases the tax base. Worth noting is that one of the most spirited barriers to effective capital gains taxation on real estate is the sustained resistance it faces from property-owning selected few, who form a powerful lobby that can block its effective implementation. 

It is important for Uganda Revenue Authority to intensify efforts in tax education and awareness, as effective administration of tax laws rests largely on their simplicity and public acceptance.  

Atwiine is a lawyer and business revenue growth consultant. [email protected]