Investors at the stock market are set to be hit by a 16 per cent addition to their transaction costs if the proposed amendments to the Value Added Tax (VAT) Act are passed into law.
The proposed amendments through VAT Bill 2013 could see stockbrokerage fall under the bracket of taxable financial services, an additional cost that market intermediaries say will be passed on to buyers and sellers of shares at the bourse.
Under the current VAT Act, financial services including stockbrokerage, insurance agency brokerage, tea and coffee brokerage are exempt from taxation.
“The services are no longer exempted from VAT and will become taxable at 16 per cent,” said Martin Kisuu, chief executive of Taxwise Consulting referring to the anticipated change in law.
The management of unit trusts and collective investment schemes and credit reference bureau services will also come under the VAT net.
Other services that the VAT Bill 2013 proposes to bring to taxation include postal services, tour operator services, travel agency services, sanitary and pest control services rendered to domestic households.
The Standard Investment Bank (SIB) executive director for corporate finance, Job Kihumba, said the tax will be passed on to the investors since VAT is an end-user tax.
The stockbrokers and investment banks charge VAT for advisory services, but the brokerage services have only been attracting a commission of up to two per cent on value of trades, part of which is remitted to KRA as a tax.
“The stock brokers being middle men will not be affected as much as the investor, given that VAT is a pass-through tax and will be passed on to the buyer or seller of the shares. However, the industry will suffer the consequences of reduced volumes,” said Mr Kihumba.
He noted that the industry, whose profitability has come under pressure due to competition which has raised staff costs, can ill afford any reduction in volume of trades.
ABC Capital general manager Samwel Kiraka said that the real challenge will be on the collection mechanism of the tax, which is not specified in the Bill.
Referring to the recent jitters in the equities market on the fears of a capital gains tax, Mr Kiraka said that any news that suggests increased tax on stock proceeds is bound to have a negative effect on market performance and eventually the margins of the stockbrokers.
“It is unclear whether this tax would be levied on both the buyer and the seller of the shares, since the brokers will pass it on to the investor, and at which point then it would mean a double tax levy on a single transaction,” said Mr Kiraka.
He said that CMA already collects a tax from the commissions charged on share sales and buys, including the contributions to the investor compensation fund.
Stockbrokers whose income was under pressure from depressed earnings from commissions in 2012 resorted to significant cost cutting measures in order to remain in the black, and there is a likelihood that further dent on commissions would see them forced to continue with the cost cuts.
Ten out of the 21 firms cut their employee costs, eight of them by more than 15 per cent in the first half of 2012.