Kenyans brace themselves for a potential hike in the cost of financial transactions and other services as the country’s Value Added Tax (VAT) is proposed to increase to 16% under the Finance Bill 2024. The Bill, which is currently under consideration by the Kenyan parliament, has sparked debate and raised concerns from various stakeholders, particularly the Kenya Bankers Association (KBA).
Proposed Tax Changes
The Bill outlines several new taxation measures, including:
- Digital Marketplace and Content Monetization Tax: A 20% tax on income earned by non-residents and a 5% tax for residents who operate or own digital marketplaces or facilitate digital content monetization.
- VAT on Betting and Gaming: An end to the current VAT exemption for betting, gaming, and lottery services, bringing them under the standard 16% VAT bracket.
- Repeal of Digital Service Tax and Introduction of Significant Economic Presence Tax: The Bill proposes to replace the Digital Service Tax (DST) with a Significant Economic Presence Tax (SEPT) levied at a rate of 30% on the deemed taxable profits of non-resident companies offering services through a digital marketplace in Kenya.
- VAT on Financial Services: The Bill seeks to remove VAT exemptions for a range of financial services, making them subject to the standard 16% VAT rate. These services include:
- Issuing credit and debit cards
- Telegraphic money transfers
- Foreign exchange transactions
- Cheque handling and processing
- Issuing financial securities
- Assigning debt for a fee
- Providing financial services for a commission.
Concerns from the Banking Sector
The Kenya Bankers Association (KBA) has strongly opposed the proposed 16% VAT on financial transactions. The KBA argues that bank charges are service fees to recover operational costs, not payments for goods, and should therefore not be subject to VAT. They have emphasized that this taxation would disproportionately burden low-income earners and small businesses who rely on these services.
Potential Impact on Consumers and Businesses
The KBA warns that the combined effect of the proposed VAT and existing Excise Duty on financial services could increase the overall tax burden from the current 15% to a staggering 40%. This significant rise in costs is likely to be passed on to consumers, making banking services less affordable.
Furthermore, the proposed VAT on foreign exchange transactions has raised concerns about its impact on economic growth. The KBA fears that this tax could widen the margins charged on foreign exchange, making Kenyan exports less competitive and hindering investments in the tourism sector. The potential rise in fuel prices due to the VAT on FX transactions is also a cause for concern, as it could destabilize the cost of living.
Call for Dialogue and Alternative Solutions
The Kenya Bankers Association has urged the Kenyan government and the National Assembly to reconsider the proposed 16% VAT on financial transactions. They have expressed their willingness to collaborate in finding alternative revenue-raising measures that would promote economic growth and financial stability without overburdening the banking sector and its customers.
The Finance Bill 2024 is still under deliberation, and the final decision on these proposed tax changes remains to be seen. Kenyans are closely following the debate, as the outcome will significantly impact the cost of financial services and potentially influence the country’s economic trajectory.
