The government could raise up to Sh13.4 billion per annum through the proposed introduction of a five percent withholding tax on the interest paid on new infrastructure bonds.
The Tax Laws (Amendment) Bill, 2024, which is currently undergoing stakeholder engagement proposes to amend the provison of paragraph 60 of the First Schedule of the Income Tax Act, which currently exempts interest income from all bonds used to mobilise funds for infrastructure projects from income tax.
According to data from the Nairobi Securities Exchange (NSE), there are 25 outstanding infrastructure bonds in the market valued at Sh1.91 trillion. The Sh13.4 billion tax estimate that the National Treasury could collect is based on applying the proposed five percent to the interest paid on the outstanding securities.
New infrastructure bonds —to which the tax will apply— are expected to be issued to redeem the existing securities gradually over the years.
The proposal to slap withholding tax on infrastructure bonds has elicited mixed reactions in the market with players such as Absa Bank shrugging off concerns that the tax risks dampening appetite for the debt instruments.
“For us we do not see a big impact to be honest. I say so because if I compare the neighbouring countries, I don’t think there’s any country around us that has a fully tax-free bond and I think for the longest we have enjoyed infrastructure bonds being tax free and obviously they are a darling to investors both local and foreign,” Absa Director for Global Markets, Stella Mambo, says.
Other pundits are, however, challenging the proposed introduction of withholding tax on infrastructure bonds arguing that it will undermine the very goal it seeks to address by elevating the government’s cost of funds.
“The ostensible intention of exempting infrastructure bond income from tax was to incentivise the market to invest in these instruments. With the proposed taxation of this income, this incentive would be eroded, thus reversing the instruments’ attractiveness and potentially depriving the government of access to debt from listed bonds,” Deloitte’s Associate Director, Fred Kimotho, told the National Assembly’s Finance and Planning Committee.
According to Absa Bank, the proposed withholding tax on infrastructure bonds is still small relative to other debt instrument issuances in the market.
“The massive portfolio inflows around infrastructure bonds are still going to be realised because that tax element is still much lower when compared to the traditional bonds,” Ms Mambo says.
Bonds maturing in five years and below have their interest taxed at 15 percent, while those with a duration of more than five years attract a 10 percent tax on their interest.
The proposed introduction of withholding tax on infrastructure bonds is among the measures the National Treasury is proposing as it seeks to raise Sh174.6 billion worth of additional revenue in 2024/25 fiscal year.
In February, the government floated an 8.5-year tenure infrastructure bond at 18.5 percent in yield, attracting a staggering Sh288.7 billion worth of bids against a target of Sh70 billion.
The government leaned significantly on the outsized proceeds from the infrastructure bond issuance to not only meet financing needs, but also address the foreign exchange pressures that had seen the shilling lose ground against major currencies.
