Ideas & Debate

Saccos ought to stop stretching tax law borders

tax capacity
It is also prudent for Saccos to build tax capacity within their accounting and finance departments. FILE PHOTO | NMG 

Over the last eight years, there has been sustained growth on Savings and Credit Cooperative Societies (Saccos) since the inception of formal regulation on the sector.

Saccos are mainly a means of saving and seeking credit facilities like long-term loans and emergency loans by the members. As a result of this we have about 174 deposit taking Saccos which are registered with the Sacco Societies Regulatory Authority (SASRA). With such levels of growth, competitiveness within the industry has increased tenfold.

According to the 2017 annual report on the operations and performance of deposit-taking Saccos , total loan issued increased by 11.29 per cent to reach Sh331.2 billion and deposits grew by 12 per cent to reach Sh305.3 billion.

The growth seen in the Sacco industry has led to fierce competition within the sector and challenged how banks do business. As such the only way for a Sacco to survive and be profitable in the market is by being continuously innovative on the products it offers. This has led to heightened competition among Saccos as each seeks to offer products that serve their clients’ more urgent needs. For any business to succeed in a competitive industry it not only has to increase its efficiencies but also seek to be innovative. Sacco have often found themselves on the wrong side of the law having launched products without considering the tax implications.

Saccos are not taxed on income which is derived from interest charged on members and as such most products tend to revolve around this. In a report tabled in 2017 by SASRA, Saccos had issued more loans than actual deposits that were made by members in three consecutive years.


This is a clear indicator of how attractive loan products are to members and Saccos have to keep coming up with innovative loan packages. Interest income from loan products to members in a Sacco is generally exempt from tax. Thus, Saccos have been very deliberate in pushing the border on what such constitute interest.

Majority of the products offered by Saccos will thus have an ‘interest’ factor so as to enjoy the benefits of tax exemption. Reducing the tax liability of any business is always a welcome move since it increases the profitability of a company.

However, the pushing of borders by the Saccos has caught the eye of the revenue authority and we have witnessed tax demands made to various Saccos. Some of these cases end up in long protracted court battles. The major bone of contention is the actual definition of ‘interest’ in relation to the money that Saccos make from their members.

In a case pitting a prominent Kenyan Sacco against the Kenya Revenue Authority (KRA), the Sacco introduced a product into the market that had a positive acceptance and uptake from various clients. The product attracted a ‘commission’ from those who took it up, but the Sacco treated this as ‘interest’ income.

KRA disagreed with this view and insisted that the income earned was a commission and not interest hence was not exempt from income tax.

On referral of the contention to the Tax Tribunal it was held that this particular product attracted a commission and not interest income. The Sacco was obliged to include the commission earned as part of its taxable income.

This was a classic example of a business pushing the boundaries to reduce their tax liability by playing around with the interpretation of the wording in the Income Tax Act.

The biggest headache for Saccos is defining their revenue streams into those that are covered by the tax exemption on memberss interest and the other fees that attracts income tax. Such definitions are open to the risk that the interpretation may be challenged by KRA and could result in the Sacco being charged penalties and interests on tax which had been erroneously calculated. This may reduce the marketability of such products since most of them only make business sense when factoring in the exemption.

In reference to the above case, it is prudent for Saccos to ensure that they carry out thorough research on the products they are churning out. They should consider the tax status of such products in order to determine whether they should subject the income received to tax or not.

It is also prudent for Saccos to build tax capacity within their accounting and finance departments so that they can adapt to the changing tax landscape in Kenya. This in turn will ensure that members’ returns are protected from being consumed by unnecessary tax penalties and interest due to lack of proper tax research and advisory.

Further, such tax capacity will assist in ensuring that products that are launched are tax-compliant, thus minimising hostile contact from KRA.

GIBSON KURIA, Tax consultant, Andersen Tax.