The Effect of Capital Gains Tax on Investmnent in Securities at Nairobi Securities Exchange

Abstract

The Kenyan government has budget deficit. To meet this deficit, there has been suggestion from various stakeholders. Among the suggestions was to reintroduce capital gain taxes to reduce the budget deficit. CGT tax was suspended in the year 1985 to spur economic growth. This study sought to establish the effects of CGT on investment in securities at NSE. The research adopted a comparative study. In this study, the volume of shares traded before the re-introduction of CGT was compared with the volume of shares traded during the period when CGT was charged. CGT was reintroduced on January 2015 till June 2015. The f-test at 95% confidence level was used to determine statistical significance of the constant terms and coefficients used in the study regression model. The study found that the CGT had negative effects on investment in securities. The correlation between CGT and number of shares traded was found to be negative. Therefore, CGT was attributed to reduced investment in securities at NSE. The model derived by the study indicated that CGT lead to 4.77% changes in the volume of shares traded. The study concluded that CGT reduces the level of investment in securities. The study supports the suspension of the CGT and recommends that the CGT should not be reintroduced. The study further recommends reduction in the rates for CGT in countries where it is already charged. Reduction in CGT rate or its suspension will lead to increased level of investment hence increased economic growth