Banks have warned of higher transaction costs if Parliament approves the proposed value-added tax and increased fees on financial services, arguing that there is a risk of declining gains in financial inclusion and eliminating money laundering.
The Kenya Bankers Association (KBA), in its reports to the National Assembly Finance and Planning Committee on the Finance Bill 2024, says the country also risks losing competitiveness as a result of taxation of cross-border remittances.
In the draft law, which is under public review, the Treasury proposed to impose VAT on financial services such as wire money transfers, issuance of credit and debit cards, foreign exchange transactions, processing of checks and issuance of securities for money, including bills of exchange. And promissory notes.
It also proposes to increase customs duties 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 would put formal money transfers out of the reach of low-income earners and SMEs, pushing them into unregulated channels that carry the risk of fraud.
“As such, this may result in individuals resorting 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 to the Kenya Revenue Authority (KRA).”
“In addition, the application of VAT to these financial services is contrary to international best practice around the world whereby financial services are exempt from VAT. It is also contrary to the basic principle of VAT as VAT applies to the supply of Goods and services, which do not include the supply of money.
The finance bill also proposed imposing a value-added tax on insurance and reinsurance services, a provision that banks want to remove, saying this will further restrict insurance penetration and make local insurers lose competitiveness.
Insurance penetration in Kenya remains low at less than two percent. The sector's growth fell by 1.7 percent last year, a development the KBA attributes to complications associated with the introduction of value-added tax on compensation for loss of taxable supplies and requirements for insurers to use an electronic system to manage tax invoices.
KBA has objected to the proposed motor vehicle trading tax to be levied at 2.5 per cent of the asset value, describing it as discriminatory due to the Sh100,000 cap that favors those with vehicles worth more than Sh4 million.
KBA added that the tax will discourage acceptance of car loans due to high operating costs that will make it difficult to service these loans.
Regarding the proposal to impose a tax on green bonds and infrastructure bonds, bankers said that the economy risks losing investments and potential flows in these products.
These bonds are now tax-exempt, making them attractive, but the draft law proposes a 5 percent withholding tax on interest earned on the bonds for local investors, and 15 percent for non-resident investors.
The bill proposes that taxpayers who object to a tax application would have seven days to provide the information the taxpayer requests or the objection will be denied.
Banks want to raise this period to 30 days from the day of notification, saying they are dealing with a lot of information due to the large size of their customer base, which means they need more time to retrieve the data.
Lenders are also opposed to extending the time required for the KRA to issue an objection decision upon receipt of a valid notice of objection from 60 to 90 days.
According to KBA, delaying decisions impacts core business profits since banks must make provisions for expected cash flows and ensure the business is prepared for the assessment.
