The Treasury removes the 20% excise tax on bank loans

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Economy

The Treasury removes the 20% excise tax on bank loans


National Treasury building. FILE PHOTO | NMG

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summary

  • The Treasury removed the 20% excise tax on bank loan fees, paving the way for a possible drop in the cost of credit for businesses and households.
  • The removal of the excise tax is contained in the budget bill and will save banks up to 7 billion shillings per year on taxes generated by loan processing fees.
  • Bankers say the cut will ease pressure on lenders to increase loan costs as the fees that attract excise taxes average 2.5 percent of overall lending rates.

The Treasury removed the 20% excise tax on bank loan fees, paving the way for a possible drop in the cost of credit for businesses and households.

The removal of the excise tax is contained in the finance bill and will save banks up to 7 billion shillings per year on taxes generated by loan processing fees.

Bankers say the cut will ease pressure on lenders to increase loan costs as the fees that attract excise taxes average 2.5 percent of overall lending rates.

“The First Schedule to the Excise Tax Act, 2015 is amended in Part Three, in the definition of ‘other charges’ by deleting the word ‘charges or commissions’ earned in respect of a loan”, indicates the treasury in the bill.

The 20% excise tax was introduced in 2018, resulting in an increase in the cost of banking services, including loans, transfers – local and international – over-the-counter withdrawals as well as ATM transactions and fees. operation of accounts.

The Treasury has retained the tax on other fees unrelated to credit processing such as obtaining account statements and clearing checks, indicating that it wants to reduce the cost of loans in an economic environment where the government does not control loan rates.

The government lifted the lending rate cap on November 7, 2019 after being accused of holding back credit growth during its three years of existence.

Banks use a base rate that is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.

The cap, which set rates four percentage points above the central bank’s benchmark loans for all customers, had eliminated that equation and the flexibility lenders say they need to meet the needs of customers viewed as risky borrowers.

Since last year, lenders have pressured the Central Bank of Kenya (CBK) to increase the cost of loans following the removal of lending rate controls.

The regulator had asked banks to present new loan pricing formulas that would serve as the basis for setting interest rates on new loans in an environment where the government did not control loan costs.

An executive at one of the major banks said removing the excise tax could ease pressure on lenders to raise interest rates.

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

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

The withdrawal of this tax comes as the government questions how to increase incomes without harming the poor.

Parliament will hold a vote on the tax measures in the coming days before the budget bill automatically becomes law on July 1.

The proposal to remove the 20% tax also comes when some banks are locked in a legal battle with the Kenya Revenue Authority (KRA) over the collection of excise taxes on fees and commissions generated by the loans.

The lenders challenged the excise tax on loan fees and filed a complaint with the Tax Appeal Tribunal (TAT) – an independent body that adjudicates tax disputes.

Banks have argued that fees and commissions on loans are exempt from tax, but the KRA maintains that income is part of their income stream and must attract the 20 percent duty.

“All income earned during loan processing is commission and not interest based on the respondent’s opinion that interest can only accumulate after the loan is granted,” KRA said. ‘last year.

The tax was doubled to 20% three years ago through the 2018 finance law, causing the cost of loans and other banking services to rise, with lenders passing the cost on to borrowers. and customers.

Fees and commissions on loans fell from 20.6 billion shillings in 2015 to 33.94 billion shillings in 2019, according to the CBK.



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