Saccos with corporate or group members, including investment clubs, are seeking clarity on their taxation amid rising disputes with Kenya Revenue Authority (KRA), which has been seeking to collect more tax from them.
Primary saccos enjoy exemption from taxes on interest earned from dealing with members, among other tax advantages.
However, KRA claims that this benefit is lost for saccos whose members include corporate entities, and that all interest is to be taxed at a rate of 30 percent.
Through their umbrella body, Kenya Union of Savings and Credit Co-operatives (Kuscco), the saccos have convened a meeting with KRA in which they are seeking a sector-wide solution on the standoff.
The dispute regards the interpretation of Section 19A of the Income Tax Act. Kuscco members have been rattled by KRA’s stance that saccos cease to be primary societies when they admit corporate members or groups, and are therefore subject to higher taxation.
KRA and Kuscco members are set to gather for a two-day National Taxation Dialogue for Saccos in Nairobi, starting September 18, in the hope that the changing nature of their membership will be clarified.
“KRA has recently issued tax assessments asserting that saccos lose the Section 19A exemption on member interest income if they admit corporate or group members,” said Arnold Munene, managing director at Kuscco in a pre-event brief.
“KRA maintains that saccos admitting corporates or groups are not designated primary societies. We believe this contradicts co-operative law, disregards decades of practice, and destabilises sacco operations.”
Mr Munene said several saccos are already in legal disputes with KRA after admitting corporates, welfare groups, employer bodies and investment clubs as members, creating uncertainty, draining resources and threatening their ability to issue affordable loans.
KRA’s position is anchored in Section 19A (4) and 19A (7), which define a “designated primary society” as one whose membership is exclusively restricted to individuals.
A designated primary society carrying out the business of a Sacco enjoys a special tax treatment, with all interest income from members fully exempted from taxation. This is a key benefit because saccos earn most of their income from lending to members.
For primary societies, the corporate tax of 30 percent fully exempts interest income from members and only taxes half of interest income from non-members and the entire other income such as capital gains and rental income.
However, for saccos that admit corporate members or groups, KRA has been reclassifying them as secondary societies, meaning they lose the exemption of interest income when calculating taxable income.
This results in a higher taxable income, since the only exemption is for dividends and bonuses, leading to a higher tax liability.
Saccos are relying on Section 16 of the Co-operative Societies Act, which they argue explicitly permits companies and unincorporated bodies to be admitted as sacco members.
The KRA forum with saccos will also highlight the lack of clear taxation guidelines for Front Office Services Activity (Fosa) and Back Office Services Activity (Bosa), which has resulted in inconsistent application of taxes and frequent disputes with the taxman.
Saccos are hoping to convince KRA to recognise corporate and group members as lawful members under Section 19A of the Income Tax Act. In addition, they are seeking a policy backing from the Ministry of Co-operatives.
