Banks have warned of higher cost of transacting if Parliament approves the proposed value-added tax (VAT) and higher excise on financial services, arguing there is a risk of rolling back gains in financial inclusion and eradicating money laundering.
The Kenya Bankers Association (KBA), in its submissions to the National Assembly’s Finance and National Planning Committee on the Finance Bill 2024, says the country also risks losing competitiveness as a result of taxing cross-border money transfers.
In the Bill, which is on public review, the Treasury has proposed to introduce VAT on financial services such as telegraphic money transfers, issuance of credit and debit cards, foreign exchange transactions, cheque processing and issuance of securities for money, including bills of exchange and promissory notes.
It is also proposing to increase the excise duty on money transfer fees by banks, money transfer agencies and other financial service providers to 20 percent from 15 percent.
Banks say the proposed changes will put formal money transfers beyond the reach of the low-income earner and the small and medium enterprises, thus pushing them to unregulated channels that carry the risk of fraud.
“As such, this might result in individuals turning to informal or unregulated channels to send and receive money. These channels often lack transparency and security, increasing the risk of fraud, money laundering, and loss of revenue for the Kenya Revenue Authority (KRA),” said the KBA in its submissions to the committee.
“Additionally, the introduction of VAT on these financial services goes against the international best practices around the globe where financial services are exempt from VAT. It also goes against the basic principle of VAT as VAT is applicable on supply of goods and services, which does not include supply of money.”
The Finance Bill has also proposed a VAT on insurance and reinsurance services, a clause that the banks want removed, saying this will further constrict insurance penetration and make local underwriters lose competitiveness.
Kenya’s insurance penetration remains low at less than two percent. The sector’s growth dropped by 1.7 percent last year, a development that the KBA attributes to the complexities tied to the introduction of VAT on compensation for loss of the taxable supplies and the requirement for insurers to onboard an electronic tax invoice management system.
The KBA has faulted the proposed motor vehicle circulation tax that will be levied at 2.5 percent of the value of the asset, terming it discriminatory due to a cap of Sh100,000 that favours those with vehicles valued at more than Sh4 million.
The KBA added that the tax will discourage the uptake of motor vehicle loans on account of higher operating costs that will make it difficult to service such loans.
On the proposal to introduce a withholding tax on green and infrastructure bonds, the bankers said the economy risks losing out on investments and potential inflows into these products.
These bonds are now exempted from tax, making them attractive, but the Bill is proposing a five percent withholding tax on the interest earned on the bonds for local investors, and 15 percent for non-resident investors.
The Bill proposes that a taxpayer challenging a tax demand will have seven days to produce the information the taxman is asking for or the objection shall be disallowed.
Banks want this period raised to 30 days from the day of notice, saying they handle a lot of information due to the big size of their customer base, meaning they need more time to retrieve data.
The lenders also oppose the extension of time required for the KRA to issue an objection decision upon receiving a valid notice of objection from 60 to 90 days.
According to the KBA, delaying the decisions impacts underlying business profits given that banks must take provisions of anticipated cash outflow and ensure the business is prepared for the assessment.
