The Treasury Division is eradicating the 20 p.c excise tax on financial institution loans

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The Treasury Department is removing the 20 percent excise tax on bank loans

economy

The Treasury Department is removing the 20 percent excise tax on bank loans

Thursday, May 06, 2021

National Finance Building. FILE PHOTO | NMG

john-mutua-img BY JOHN MUTUA
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Summary

  • The Treasury Department has abolished the 20 percent excise tax on bank loan fees, paving the way for a possible decline in borrowing costs for businesses and households.
  • The abolition of the consumption tax is included in the Finance Act and provides that banks save up to 7 billion Shillings annually in taxes that arise from fees for processing loans.
  • Bankers say the cut will ease pressure on lenders to increase borrowing costs, as the fees that attract the excise account averaged 2.5 percent of total loan interest.

The Treasury Department has abolished the 20 percent excise tax on bank loan fees, paving the way for a possible decline in borrowing costs for businesses and households.

The abolition of the consumption tax is included in the Finance Act and provides that banks save up to 7 billion Shillings annually in taxes that arise from fees for processing loans.

Bankers say the cut will ease pressure on lenders to increase borrowing costs, as the fees that attract the excise account averaged 2.5 percent of total loan interest.

“The first schedule of the 2015 Excise Duty Act will be amended in Part 3 in the definition of” other fees “by removing the word” fees or commissions “earned on a loan,” says the Treasury bill.

The 20 percent excise tax was introduced in 2018, which increased the cost of banking services, including loans, wire transfers – both local and international – over-the-counter withdrawals, as well as ATM transactions and account operating fees.

The Treasury Department has withheld tax on other fees not related to credit processing, such as collecting bank statements and verifying checks, indicating that it wants to reduce the cost of credit in an economic environment where the Government does not control lending rates.

The government lifted the cap on lending rates on November 7, 2019 after accused of holding back loan growth during its three-year existence.

Banks use a base rate, which usually represents the cost of funds plus a margin and risk premium, to determine how much to charge a particular customer.

The cap that put interest rates four percentage points above benchmark central bank lending for all customers had overridden that equation and the flexibility lenders need to accommodate customers who are considered risky borrowers.

Since last year, lenders have been putting pressure on the Central Bank of Kenya (CBK) to increase the cost of borrowing after the removal of controls on lending rates.

The regulator had asked banks to come up with new loan pricing formulas that would form the basis for setting interest rates on new loans in an environment where the government did not control the cost of borrowing.

An executive from one of the top banks said the abolition of the excise tax could ease pressure on lenders to raise interest rates.

“If the tax is canceled, we will most likely pass it on to customers. Most banks will lower their fees on loans, ”said one banker, who asked not to be identified.

Lending rates fell from 17.66 percent in August 2016 to 13.86 percent in September 2016 after the cap was introduced, and averaged 12.02 percent in February, according to CBK data.

The withdrawal of this tax comes as the government debates how to increase revenue without hurting the poor.

Parliament will vote on the tax measures in the coming days before the finance law automatically comes into force on July 1st.

The proposal to remove the 20 percent tax also comes after some banks are embroiled in a lawsuit with the Kenya Revenue Authority (KRA) over the imposition of excise taxes on fees and commissions on loans.

Lenders have challenged excise duty on loan fees and filed a lawsuit with the Tax Appeals Tribunal (TAT) – an independent body that settles tax disputes.

Banks have argued that fees and commissions on loans are tax exempt, but the KRA claims that the revenues are part of their sources of income and must collect the 20 percent tax.

“All income generated during loan processing is commission and not interest, based on the respondent’s opinion that interest cannot be accrued until the loan is granted,” the KRA said last year.

The tax was doubled to 20 percent three years ago by the Finance Act of 2018, which increased the cost of loans and other banking services as lenders passed the cost on to borrowers and customers.

Fees and commissions on loans rose from Sh20.6 billion in 2015 to Sh33.94 billion in 2019, according to the CBK.