Financial services VAT, higher excise on cash transaction charges plan

The VAT on financial services will hit telegraphic money transfer services.

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The proposal to introduce a 16 percent VAT charge on banking and insurance services while raising the excise rate on fees charged on bank cash transfers to 20 percent from 15 percent has been opposed by the sectors.

The VAT on financial services will hit telegraphic money transfer services, issuance of credit and debit cards, foreign exchange transactions, cheque processing and issuance of securities for money, including bills of exchange and promissory notes.

The VAT will be charged on insurance and reinsurance services, although the premiums are exempted from the tax.

The excise on fees charged on mobile money transactions, airtime and data has also been increased to 20 percent from 15 percent.

The Kenya Bankers Association (KBA) submitted to MPs that the proposed changes will roll back gains made in financial inclusion, and also risk raising cases of fraud and money laundering with the high costs forcing low income earners and enterprises to use unregulated channels.

Insurance penetration

The banks also argued that the introduction of VAT on financial services goes against the international best practice where financial services are exempt from VAT, and goes against the basic principle of VAT where it is applicable on supply of goods and services, which does not include supply of money.

The bankers further argued that VAT on insurance services will constrict insurance penetration and make local underwriters lose competitiveness against international competitors.

In its submissions on the excise changes, Safaricom said in addition to eroding gains in financial inclusion, the higher levy opens the door to black market money transfer options that will hurt efforts to expand the tax net.

The company also argued that the fees on mobile transfers have for a long time been lower than those on other financial transactions, recognising that the mobile money transfer segment serves the unbanked community.

Safaricom told MPs that raising the cost of airtime and data services through the higher excise charge will deepen digital exclusivity, restricting access to the well-off and defeat the government’s agenda of offering essential services through digital platforms.

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