Banks warn 16pc VAT will make services costly

KBA has cautioned against implementing the proposed 16 percent value-added tax (VAT) on financial transactions.

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The Kenya Bankers Association (KBA) has cautioned against implementing the proposed 16 percent value-added tax (VAT) on financial transactions, saying the policy could hamper financial inclusion efforts and particularly affect low-income individuals and small businesses.

The KBA said the proposed levy would also widen the margin charged on currency exchange transactions, which poses a risk to economic growth as it would adversely affect foreign investments in Kenya as well as reverse the recovery of the tourism industry.

“Coupled with excise duty, the total taxation on financial services would reach 40 percent, from the current 15 percent (excise duty only), significantly impacting affordability and accessibility,” said the lobby in the statement signed by acting CEO Raimond Molenje on Friday.

“The VAT application on foreign exchange transactions would also result in increased costs, including fuel prices, reversing efforts and progress made in stabilising the cost of living.”

In the proposals under this year’s Finance Bill, the Treasury has amended the list of VAT-exempt services, effectively introducing VAT on foreign exchange transactions, which include the supply of foreign drafts and international money orders.

Cheque handling, including processing, clearing and settlement, special clearance and cancellation will also attract VAT at 16 percent if MPs ratify the proposals.

Other services targeted for VAT are the issuance of securities for money, including bills of exchange, promissory notes, money, and postal orders.

Financial institutions are also set to levy VAT during the issuance of credit and debit cards.

Financial services face even higher taxation with the proposal to raise the excise duty on mobile transfer services by banks and telcos from the current 15 percent to 20 percent.

The latest proposal comes after the rates were raised last year. The Finance Act 2023 raised excise duty on money transfer services by cellular phone service providers or FSPs licensed under the national payment system from 12 to 15 percent.

The enactment, however, lowered the duty on money transfer services by banks, money transfer agencies, and other FSPs from 20 percent to 15 percent, which the current bill seeks to reverse.

In its pushback, the KBA has called for a balanced approach to taxation that supports public services and economic development without veering off from the existing banking principles.

“We call upon the government and the National Assembly to engage the private sector and the banking industry to be available for a discussion on the viable alternative revenue-raising measures that will promote economic growth and financial stability for our country,” the statement reads.

The bankers’ lobby is the latest major organisation to weigh in on the proposals that have sparked intense debate across a range of economic sectors.

Its input mirrors that of audit and consultancy firm KPMG which has warned that the approval of the proposals could deal a major blow to years-long financial inclusion efforts.

“If the proposals are adopted, it is expected that they will increase the cost of the various financial and insurance services which might limit the access of these services to ordinary Kenyans,” said KPMG.

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