Budget: Don’t overtax emerging sectors

Tuesday, June 11th, 2024 06:00 | By
Tax Representation. PHOTO/ Print
Tax Representation. PHOTO/ Print

With the budget scheduled to be read on Thursday, we must avoid shooting ourselves in the foot with our forecasting by hitting hard those that we are supposed to protect for economic growth.

While Kenya undoubtedly requires revenue from the 20 percent excise duty levied on interest and fees, the unfortunate reality is that the Treasury is imposing this duty on top of existing taxes.

This not only constitutes a two-pronged assault on the ease of conducting business but also an affront to the financial sector, now pressed hard by soaring interest rates. This escalation in the cost of credit poses a significant threat to innovation in the nascent fintech sector, which is supposed to be the goose that lays the golden egg. The proposed excise duty, outlined in the Finance Bill 2024, has raised fundamental concerns at a time when bank loans may be inaccessible to many Kenyans due to stringent requirements.

Initially passed in 2022, this duty applies to both interest and fees and becomes due upon loan disbursement rather than upon repayment, creating challenges for both borrowers and lenders. Experts argue that this excise duty is imposed on unbooked revenue and fails to consider the high rate of default prevalent in the sector.

What is more, since other financial institutions like banks are exempt from excise duty on interest and fees, this imposition hinders the ability of fintech firms to compete fairly in the credit market.

In November 2023, the Kenya Revenue Authority announced plans to integrate its tax system with digital credit providers, allowing for real-time collection of excise tax. Unfortunately, the dynamics of digital loans differ significantly from other sectors, especially considering that digital lenders often provide short-term capital for basic needs and emergencies.

Mobile loans from tech lenders have become indispensable to millions of borrowers for meeting short-term expenses such as business capital injections, paying cyclical bills like school fees and rent, and covering immediate needs.

The cost of the excise duty will likely prompt digital lenders to pass on the added costs to borrowers, reducing access to credit for millions who cannot obtain loans from other regulated lenders.

This could also diminish returns on investment and worsen defaults as borrowers struggle with higher repayment costs.

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