Banks sought to have the income tax law changed so members can use CBK’s prudential guidelines to account for the dud loans that allow higher deductions, hence lower tax.
A parliamentary committee has rejected banks’ proposal to reduce taxable incomes after it adopted the more stringent regulations of the Central Bank of Kenya (CBK) in provisioning for non-performing loans.
In a submission to the National Assembly’s Committee on Finance and National Planning, the Kenya Bankers Association (KBA) sought to have the income tax law changed so members can use CBK’s prudential guidelines to account for the dud loans that allow higher deductions, hence lower tax.
The MPs said reclassifying the loans would result in revenue loss to the Exchequer, and argued that the aggressive provisioning under CBK was meant to protect depositors while the taxman seeks to collect revenue.
“….For financial institutions licensed under the Banking Act, Cap 488, the deductible bad debts shall be determined based on Central Bank of Kenya prudential guidelines," recommended the bankers. The institutions said the amendment would align the computation of bad debts provisions for tax purposes to those of the CBK, which would effectively reduce the challenge of tracking every transaction.
“The CBK guidelines have higher provisions for bad debts to protect depositors. If the CBK guidelines are adopted, they will reduce taxable profits of the financial institution, leading to loss of tax revenue,” the report of the committee said.
The argument advanced by bankers has emerged in the past but the KRA has been prompt to counter that the accounting method for bad debt cannot be equated to that used by the regulator of financial institutions because the latter’s role is different.
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