Initially, there was uncertainty concerning this excise tax—e.g., what was the definition of a “financial institution” subject to the tax? Also, a court challenge to the tax gave rise to ambiguity with respect to the effective date of the tax.
The following discussion examines some open questions and the status of the excise tax on financial services fees in Kenya.
Following presentation of the 2012/13 budget proposals, certain members of Parliament supported making non-related changes (i.e., revisions to the legislators’ retirement packages) during their consideration of the budget proposals.
The Finance Minister subsequently proposed amendments to the Finance Bill, 2012, expressing an interest in raising more tax revenue. One such amendment was to introduce an excise tax (duty) on fees charged by financial institutions, with the tax to be imposed at a rate of 10%.
The Finance Minister’s proposed amendment (dated 9 January 2013 but only made publicly available 6 February 2013) raised a number of issues, including:
- What would be the effective date for this excise tax?
- What would be the definition of “financial institutions” subject to this excise tax?
- Would interest payments made by these financial institutions be covered by and subject to this 10% excise tax?
Tax authorities weigh in
The Kenya Revenue Authority then announced that the excise tax for January 2013 was due on 20 February 2013—thus launching a controversy with bankers.
Bankers who were potentially subject to the new excise tax requested certain concessions from the tax authority, so as to afford their financial institutions sufficient time to put in place an effective system and framework for implementing measures under this excise tax. Bankers also noted the lack of clarity on certain fundamental issues—such as who was liable to collect the excise tax.
The Kenya Bankers Association then filed a judicial action, and ultimately received a court order effectively enjoining the Kenya Revenue Authority from implementing the new law.
Terms subsequently defined
While the controversy concerning the excise tax continued, the Finance Bill, 2013, was presented, and it proposed further amendments to the Fifth Schedule under Kenya’s Customs & Excise Act in order to address certain ambiguities and to provide a framework for properly implementing the excise tax on financial services fees.
These amendments included definitions of “financial institutions” and “other fees.”
- “Financial institutions” are defined to include persons licensed under the Banking Act, Insurance Act, and Micro Finance Act, among other legislation.
- “Other fees” are defined to include fees, charges or commissions charged by financial institutions (but not interest).
The effective date for these amendments was 18 June 2013.
The Kenya Revenue Authority also announced that it expected banks and insurance companies to remit excise taxes on 20 July 2013 for the period 18 to 30 June 2013.
While at first glance, it might appear that the recent amendments and announcements would have resolved some of the remaining ambiguity, it has been observed that financial institutions continue to face uncertainty concerning this excise tax (duty).
For example, the Finance Bill, 2013, only amended the definition of what is a “financial institution.” The “charging section” that first introduced the excise duty was not amended, and it is this “charging section” that was challenged by the Kenya Bankers Association and was suspended by court order. Therefore, some have argued that, despite the clarifications, the law cannot yet be implemented.
Second, the Customs & Excise Act is the law under which the 10% excise duty on fees charged by financial institutions is based. Section 2 of this Act defines “excise duty” as:
…a duty of excise imposed on goods manufactured in Kenya or imported into Kenya and specified in the Fifth Schedule.
By definition, therefore, an excise tax (duty) can only be imposed on goods. Financial institutions trade in services—not goods. Thus, the statutory definition appears to limit excise duty to goods, and begs the question of whether a 10% excise duty on fees for financial services is properly payable.
Third, Kenya’s Consumer Protection Act, 2012, requires customers to be informed at least 30 days in advance of any proposed changes to tariffs for goods or services. A requirement to charge and account for excise duty imposed by subsidiary legislative provisions (Fifth Schedule to the Customs & Excise Act) before 17 July 2013 (which is the earliest date by which banks would have complied with the requirements of the Consumer Protection Act) is viewed by some as being in conflict with this statutory consumer-protection provision.
Fourth, while the Finance Bill, 2013, appears to provide some clarity for bankers, insurers and insurance companies may view the provisions with uncertainty. The definition of “other fees” does not exclude “premiums” or “excess” payments or charges by insurance companies. Accordingly, would this new excise tax increase insurance premiums by 10%? Insurance companies will watch this area with interest given that insurance penetration in Kenya is still in single digits (except for compulsory motor vehicle insurance).
Lastly, it has been questioned whether membership fees paid to a “sacco” (a savings and credit cooperative society in Kenya) may also be subject to excise tax because saccos are also listed as financial institutions.
For more information, contact a KPMG tax professional in Kenya:
+254 20 280 6224