Banks warn VAT on transactions could damage Kenya's economy

Customers seek help at the Consolidated Bank Banking Hall. [Wilberforce Okwiri, Standard]

Tax experts, bankers and financial inclusion advocates in Kenya are expressing concern about the proposed implementation of value-added tax (VAT) on various banking services contained in the Finance Bill 2024.

The Kenya Bankers Association (KBA) said the new proposal will mean the outlined financial services will attract a VAT charge of 16 per cent if the Finance Bill 2024 is enacted, putting more financial burden on the bank customer.

The Bill proposes VAT on transactions such as foreign exchange (forex), money orders, telegraphic transfers, credit card issuance, and cheque processing, which were previously exempt.

It also proposes to increase excise duty on financial services from the current 15 per cent to 20 per cent.

“Consequently, a customer will pay a total of 39.2 per cent on fees charged by banks as tax if the proposals are enacted to law,” said KBA acting chief executive Raimond Molenje.

“For example, if a bank charges a customer Sh100 for money transfer, the Bill proposes an additional Sh39.20 to be paid by the customer to cater for taxes (excise duty at 20 per cent and VAT at 16 per cent) bringing the total cost to Sh 139.20,” he said.

KBA warned this will likely push customers to transact in cash outside Kenya’s globally recognised leading financial ecosystems with adverse loss in taxes which banks “diligently collect on behalf of the government”.

“We urge the National Assembly to reconsider these proposals and maintain the current status of exempting financial services from VAT and sustaining the 15 per cent Excise Duty,” Mr Molenje said.

A section of bank bosses also warned yesterday that the proposed taxation measure will hurt Kenya’s status as a financial hub and eradicate gains made by East Africa’s largest economy.

Tax experts and banking industry players reckon that the new VAT charges will make banking more expensive for Kenyans, potentially discouraging them from using formal financial services.

“This will make banking more expensive and Kenya as an uncompetitive jurisdiction. Those fintech companies who are based outside Kenya and facilitate such transactions will benefit from this at the cost of local banks,” Kunal Ajmera, the chief operating officer at consultancy firm Grant Thornton Kenya told The Standard.

This could hinder progress towards financial inclusion, a key goal for developing economies like Kenya, bankers have warned.

“The scrapping of VAT exemptions for banking transactions...will make basic banking expensive, raise cost of credit, and drive people to the black market,” said NCBA chief executive John Gachora on X, the platform formerly known as Twitter.

The concern is that higher costs might push people back towards informal financial systems, which are often less secure and transparent, bankers said.

Additionally, Kenya’s competitiveness as a financial hub in the region could be affected if banking services become more expensive compared to neighbouring countries, they added.

“Kenya has been a leading light in financial inclusion globally. An unnecessary tax on banking transactions will make us uncompetitive. Large FX transactions will be offshored. Completely unnecessary,” Mr Gachora said.

He asked legislators to reject the proposed tax measure to save Kenyans the economic pain of accessing banking services.

“(I am) urging our MPs to do the right thing. Keep Kenya a leading light when it comes to banking and finance - reject this attempt to tax you for a simple act of paying for goods and services.”