KRA plans to adopt flexible tax payment plan for banks after Sh36bn bad loans rise

What you need to know:

KRA is in talks with individual banks to determine the amounts to be paid and agree on a payment plan.
Some lenders have increased their provision almost threefold making it difficult for the KRA to hit its tax targets.
Banks have experienced a Sh36.6 billion rise in bad loans in the first three months of this year alone, which is a 10-year high.

The Kenya Revenue Authority (KRA) will craft an adjustable payment plan for banks that increased provision for bad loans in a move that reduced income tax payment.

The KRA acting chief manager Regional Coordination Unit-Domestic Tax Department Ezekiel Obura said the taxman was in talks with individual banks to determine the amounts to be paid and agree on a payment plan.

“We are working with the banks that reported the increase in provision to address it. We will provide for a payment plan to see how they settle it (taxes),” Mr Obura said at the Annual Leadership Summit on Friday.

Some lenders have increased their provision almost threefold making it difficult for the KRA to hit its tax targets, said Mr Obura.

Banks have experienced a Sh36.6 billion rise in bad loans in the first three months of this year alone, which is a 10-year high, as the CBK moved to ensure they treat the bad loans, referred in the industry as Non-Performing Loans (NPL), in accordance with prudential guidelines.

Total dud (bad) assets, currently at Sh176 billion represent eight per cent of all loans issued by banks, up from 6.1 per cent in December and 4.6 per cent in June last year.

Banks are required to set aside cash, which is deductible as an expense, to ensure they are able to absorb any losses incurred from loan defaults.

This eats into the lenders’ bottom-line and viewed against the current situation, means they reported depressed performance and are seeking tax deduction from the KRA.

READ: KRA puts rogue bankers on notice over insider loan taxes

But tough-talking KRA boss Commissioner-General John Njiraini has ruled out tax deduction blaming the banks for the sharp increase in the NPLs.

“In respect of the banking sector, KRA has taken the position that bad debts occasioned by lending practices inconsistent with the CBK prudential guidelines shall not qualify for deduction for tax purposes,” Mr Njiraini said in a recent statement.

“For this reason, banks shall not be permitted to enjoy tax deductions for loans arising from irregular insider lending or loans for which inadequate collateral was secured.”

Mr Obura, however, said the taxes will not hit the lenders immediately and will be subject to an audit that would take months.

He also said banks would have a chance to appeal the assessments just like in any other tax claims. “Banks should not be worried, we will establish the right tax figure to realise the expected tax targets,” he said.

The KRA collected Sh842.5 billion in the nine months to March, a 11.7 per cent growth over the same period the previous fiscal year.

However, the taxes were below the nine-month target of Sh911.6 billion by a significant Sh69 billion. Mr Obura said the taxman was concerned by disruption of the business environment that is causing a dip in profitability, making it difficult for the taxman to hit its targets.