Cost of loans to rise after MPs approve 20pc duty

The cost of credit is to rise from July after lawmakers rejected a plea from bankers to exclude fees and commissions earned on loans from 20 percent excise duty.

The parliamentary Finance and Planning Committee has retained a proposal in the Finance Bill 2021 to remove “fees or commissions” earned by financial institutions on a loan from exemption from duty under the current law.

This will see banks pay the taxman more than Sh7 billion annually in taxes on fees and commissions charged on processing loans, which stood at Sh35.87 billion last year, according to data from the Central Bank of Kenya.

The committee argues the proposed amendment to Part Three of the Interpretation Schedule to the Excise Duty Act, which changes the definition of ‘other fees’ was in line with a government policy to reduce tax incentives.

“The committee rejected the proposal as it will negate the intended objective of reducing the tax expenditure. This will also erode the tax base,” Homa Bay Women Rep Gladys Wanga-led chaired committee wrote in its report for debate and approval by the House.

If approved by the House, which should debate and pass the Bill into law by end of this month, loan-related fees and commissions will be subject to duty from July 1.

The Kenya Bankers Association (KBA), a lobby for the lenders, had in its presentation to the lawmakers argued that the imposition of excise duty on fees and commissions will raise the cost of borrowing.

The KBA said a higher cost of credit would, in return, likely affect access to credit at a time businesses and households were looking for cash to recover from the knocks of the Covid-19 pandemic.

Tax experts have argued that the Treasury’s move to amend the law regarding fees and commissions earned by lenders on loans was a reaction to rulings by Tax Appeal Tribunal that fees such as loan administration fees were not subject to excise duty.

The 20 percent excise tax was introduced in 2018, triggering an increase in the cost of bank services such as transfers — both local and international, over-the-counter withdrawals as well as ATM transactions and account operating fees.