Why Loans Will be More Expensive From July

A decision by Parliamentarians to retain a proposal to remove fees and commissions earned by financial institutions on loans from exemption from excise duty is set to drive up the cost of credit in Kenya from July 2021.

The institutions will have to pay 20 per cent excise duty on fees and commissions earned on loans after the Parliamentary Finance and Planning Committee rejected pleas by bankers to drop the proposal. The proposal was contained in the Finance Bill 2021.

The Kenya Revenue Authority (KRA) is expected to generate over Ksh7 billion annually from taxes on the fees and commissions charged for processing loans.

“The (Parliamentary Finance and Planning) committee rejected the proposal as it will negate the intended objective of reducing the tax expenditure. This will also erode the tax base,” the Homa Bay Woman Rep Gladys Wanga-led team wrote in its report submitted to the House.

If the report is debated and approved by the end of June as expected, loan-related fees and commissions will be subject to duty from July 1.

The 20% excise tax was first introduced in 2018, raised from 10%. It was responsible for a spike in costs associated with bank services including transfers and account operating fees.

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In 2018, the banking sector collected 44% of total excise taxes collected in the financial services sector.

The Kenya Bankers Association (KBA) in its submissions to the committee had argued that retention of the excise duty would raise the cost of credit at a time when businesses and households were looking to bounce back from the effects of the Covid-19 pandemic.

The Wanga-led committee, however, maintained that the proposed amendment to Part Three of the Interpretation Schedule to the Excise Duty Act, changing the definition of ‘other fees’, was in line with a government policy to reduce tax incentives.

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