MPs reject bid to tax infrastructure bonds

The imposition of tax on interest earned from infrastructure bonds would have ended tax-free government securities as other papers attract withholding tax.

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Parliament has scrapped National Treasury's plan to impose a five percent withholding tax on interest earned from new infrastructure bonds, citing the need to maintain the attractiveness of the fixed income securities to investors.

The National Assembly's Finance and National Planning Committee has pulled the plug on the plan to tax the special category of government bonds after receiving stakeholder submissions opposing the move.

The committee expects the retention of the tax-free status on interest accrued from the infrastructure bonds to preserve the bonds' attractiveness to investors.

“The committee agreed to the proposal to make the securities attractive for investments,” the Kuria Kimani led committee said in its report on the consideration of the Tax Laws (Amendment) Bill, 2024 currently in the National Assembly.

Industry stakeholders including the Nairobi Securities Exchange (NSE) and the Kenya Association of Stockbrokers and Investment Banks (KASIB) warned investor bids for the infrastructure bonds would wane on the imposition of withholding tax on interest earned.

“There is an increased appetite for infrastructure and green bonds because of the very purpose for which they are issued," the stakeholders said in submissions to the committee.

"They noted that infrastructure bonds attract investors to whom infrastructural development is appealing to them. In contrast, green bonds attract investors who are subscribed to the global agenda of sustainability, maintaining a green environment, and ensuring a future for mankind."

The government was set to eventually raise up to Sh13.4 billion per year through the taxation of interest earned from infrastructure bonds.

There are 25 outstanding infrastructure bonds listed on the Nairobi Securities Exchange (NSE) with a market value of Sh1.91 trillion as at the end of last week.

The Sh13.4 billion tax estimate that the exchequer could collect is based on applying the proposed five percent to the interest paid on the outstanding securities.

The imposition of tax on interest earned from infrastructure bonds would have ended tax-free government securities as other papers attract withholding tax.

Government debt securities maturing within five years including Treasury bills attract withholding tax on interest earned at the rate of 15 percent while those with a duration of more than five years attract a 10 percent tax.

Recent infrastructure bonds have all been oversubscribed revealing the appeal of the tax-free securities to investors.

February’s infrastructure bond which was seeking to raise Sh70 billion for instance received bids of Sh288.6 billion representing a 412.37 percent performance rate.

August’s re-opened 6.5 year and 17-year infrastructure bonds were also over-subscribed with investor bids topping Sh126.3 billion against Sh50 billion on offer.

Infrastructure bonds were first introduced in 2009 with the goal of unlocking financing for infrastructure projects including roads, electricity and water. The government has tapped the high demand for infrastructure bonds by investors to fund its domestic borrowing target as other tax-accruing papers fail to garner the same level of interest.

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