Kenya Association of Stockbrokers and Investment Banks (Kasib) is warning that the proposed 14 percent tax on stock exchange brokerage will be passed to investors, potentially cutting appetite for shares and bonds in a market suffering from low local investor participation.
The Tax (Amendment) Bill 2020 is proposing introduction of value added tax (VAT) on brokerage services that are now VAT-exempt.
The bill wants an amendment to the first schedule, number 35 of VAT Act 2013 and introduce the 14 percent tax on insurance agency, insurance brokerage, securities brokerage services, tea and coffee brokerage.
Kasib warns that the tax will lead to an increase in the cost of stockbrokerage, which will ultimately be paid by investors.
“This will make investing in shares and bonds quite unattractive to investors, both domestic and foreign,” said Kasib chief executive Willy Njoroge.
“There will be reduced investment in shares, making it difficult for companies to raise money from the stock market.”
Currently, the highest commission chargeable to stockbrokers is 1.78 percent, which is applicable to amounts up to Sh100,000. Above this amount, commissions are negotiable, subject to a maximum of 1.5 percent.
It is on this commission that the VAT will be levied.
The proposals by government come at a time the Nairobi Securities Exchange (NSE) is facing bearish season triggered by coronavirus pandemic that has led to foreign investor flight.
Foreign investors sold Sh11.2 billion in the first quarter of the year as they searched for safe haven at a time NSE was on a decline, touching the lowest level in 17 years.
Kasib says the proposed VAT will push investors out of the bourse to search for alternatives.
The lobby further warns that the tax will reduce investment in government securities, making it harder for government to meet its debt funding requirements.
The bill also wants to introduce 10 percent withholding tax on infrastructure bonds and green bonds, all which are currently tax exempt.
Kasib is proposing that government drops the move in order to save the NSE from investors’ apathy.
Foreign investors are seen as the engine of the NSE, commanding huge volumes in top five counters- Safaricom, Equity Bank, East African Breweries, KCB and Cooperative Bank.