Legal basis for property rates
Article 209(3) (a) of the Constitution of Kenya gives County governments the power to impose property taxes. Land rates are just but one of the many kinds of property taxes that the County governments can impose. Such kind of property taxes plays a major role in the financing of local authorities not only in Kenya but across the world. Land rates are an avenue by which County Governments are meant to raise revenue to supplement what the National Government is devolving in order ensure the respective development agenda is achieved. Thus the most important form of tax collected by local authorities now County Governments in Kenya are the rates which are levied on land and buildings. The Valuation Rating Act Cap 266 and Rating Act Cap. 267 are the basis of rating. Under the law, rates in Kenya are payable by individual property owners, business and the government. They are payable to the local authority in which the property is located. Remissions are given for timely payments, while rate payers are penalized for payments outstanding after the year they fall due.
In our country the valuation of property tax by local authorities as they were before the enactment of the new Constitution is guided by the Valuation of Rating Act. Assessment is done using an area rating (based on size) in combination with either an ad valorem system based on land or on both land and buildings. All local authorities levy the property tax based either on area and/or unimproved site valuation. Buildings are not taxed in Kenya i.e. only land is taxed. Typically area rating is used in the more rural counties while ad valorem land taxation is used in the more urbanized areas. Some local authorities use both area rating and site valuation rating simultaneously.
There are institutions which are by law exempted from payment of rates, including cemeteries, hospitals, public religious worship places, museums and national parks, etc. These institutions are specified in the Rating Act and are gazetted with the approval of the Minister.
Land owned by the National Government in Kenya is taxed by the county governments like it is private property such taxation is facilitated by Section 23 of the Rating Act which is the basis upon which the National Government pays rates to the Local Governments (Counties) in the form of Contribution in lieu of rates. In accordance with the Rating act such contribution is compulsory by the National Government the government however has not been making full payments in respect of the said rates. The law and literature available does not also define what contribution in lieu of rates is.
It is clear that property taxes are meant to contribute to a substantial amount of the revenue that county governments collects, it is possible therefore that the National Government, the Legislature, the Judiciary and other state organs might own a substantial amount of Land in the Counties and thus if such state organs refuse to pay property taxes on the basis that they are government, then we will cripple devolution by limiting the revenue raising capacity of the respective County Governments.
In other jurisdictions the government is exempted from paying property taxes, in our jurisdictions the government pays property taxes in the form of contribution in lieu of rates, in jurisdictions like South Africa and Namibia a 20% reduction is provided on tax owed with respect to government land, while in other jurisdictions the Government makes a lump sum ad hoc contribution to local authorities for services rendered in lieu of paying explicit property taxes.
Options to be considered in Kenya
- Kenya has the option of maintaining the current system where the National Government makes compulsory contributions in lieu of rates. This system should however be changed and aligned with the new devolved structure as provided for the Constitution of Kenya 2010.
- Kenya has also the option of exempting state organs from paying property taxes completely. Such a system will however cripple the revenue raising capacity of county governments because state organs own a large acreage of land that is within the jurisdiction of County Governments.
- Kenya can adopt the system that was provided for in the Local Authorities Transfer Fund Act where 5% of the National Revenue collected went to local authorities. Such a mechanism however may not be practical because the Constitution already provides that not less than 15% of the national revenue shall be devolved to the Counties. Thus if such an idea is to work the wording should be to effect that a percentage of the national revenue shall be collected and devolved to the Counties for the purposes of paying land rates for land owned by the National Government. Such percentage should be calculated after stock taking to determine how much land is owned by the National Government in each county.
In light of the above and the fact that the it is clear that there is lack of a clear policy direction with respect to implementation of Article 209(3) (a) that gives County Governments the mandate to impose property taxes on the National Government and other state organs.
Written by
Mweresa Eugene Sudi
Sudi & Associates