The Treasury has finally published the much-awaited Income Tax Bill, 2018. If enacted, the law will overhaul the current legislation, which came into effect in 1973. The measures contained in the Bill intend to improve collection of taxes particularly from the informal sector and high-income earners whilst simplifying the administration of taxes.
The Bill has proposed to change the taxation regime applicable to a co-operative society, which carries on business as a savings and credit co-operative society (sacco).
Under the current regime, the income of a sacco, which comprises interest income from members, 50 per cent of the interest income from non-members and royalty income earned by a sacco are all exempt from taxation.
The Bill proposes to exempt only interest income from members. This implies that any royalty income earned by a sacco or the entire interest income from non-members will become taxable if the Bill is enacted in its current state. The implication of this proposal is that the after-tax income of a sacco, which would ideally be available for distribution to members as dividends, will reduce.
The Bill also proposes to double the withholding tax rate applicable to the dividends payable by a sacco from five to 10 per cent. Sacco members should therefore expect to receive reduced after-tax dividends when the law is enacted.
The proposed tax measures on Saccos come at a time when the growth of the sub-sector has been steady. According to the Sacco Societies Regulatory Authority (Sasra), the Kenyan deposit-taking sacco (DT-sacco) segment has remained robust with regard to all the parameters on growth performance.
The total asset base of the DT-saccos grew in 2016 to reach Sh393.49 billion, compared to Sh342.84 billion recorded in 2015. Saccos, known in other countries as credit unions, provide an alternative to banks for low-income earners who need financing.
The ability of saccos to provide loans at relatively low-interest rates has attracted members and contributed to their growth across Kenya. The proposed tax measures on the sub-sector may therefore slow down the growth of saccos and it will be important for the government to reconsider the proposal.
Lugongo is a tax manager at Deloitte. [email protected]