Digital Lenders In Kenya Reject Tax Proposals

Digital lenders in Kenya have rejected a proposal requiring them to remit a 20% Excise duty on interest charged on loans while other financial institutions only required to pay the tax on ‘other fees.’

In their submissions to the Finance Committee of the National Assembly public participation on the Finance Bill 2023, Digital Financial Services Associations of Kenya (DFSAK) has described the move as discriminatory and punitive in the current economic situation of the country.

“This means that while Digital Lenders are paying Excise Duty on interest on digital loans, other financial institutions including banks are not,” DFSAK chairman Kevin Mutiso explained in his submission to legislators.

The imposition of excise duty on interest charged by digital lenders, the Association said, contradicts the approach taken on core incomes of financial institutions, such as interest for banks, premiums for insurers, and premium-based commissions for insurance brokers, where these incomes are exempted from excise duty.

The main effect of this is that while Digital Lenders have Excise Duty charged on any amount that they charge in respect of lending which includes interest on loans, other financial institutions only have Excise Duty charged on “Other Fees,” which specifically removes interest on loans and return on loans from the ambit of Excise Duty.

“This leads to a lopsided market favoring other financial institutions over digital lenders when both sets of institutions provide the same service to the citizens of Kenya. The extra expense borne by Digital Lenders as a result of this makes it more difficult for them to compete with other financial institutions as they have a higher tax obligation,” Mutiso added.

The proposal, as currently drafted the digital lenders submitted, will be detrimental to the innovation of FinTechs in Kenya, make access to credit costly for about 8 million citizens who cannot access the more formal or conventional forms of credit, and disrupt consistency in tax collection.

“Either the Financial institutions are subject to the same regime that digital lenders are subject to and they add upto KES 100 billion in additional tax revenue or we are subject to the same tax rate as them and we let FinTech continue thriving in Kenya” Kevin Mutiso added.

“It also makes credit more expensive to the cadre of Kenyans served by Digital Lenders as opposed to those served by other financial institutions, creating a superfluous economic disparity negatively affecting the bottom of the pyramid,” according to the association.

DFSAK are pushing legislators to amend the provision by leveling the playing field including a decision to compel the banks to pay the levy on all credit to promote a free-market economics lending.

“All financial institutions (both traditional and digital lenders) will have the same cost of credit and will have to rely on innovation and customer satisfaction to thrive. The benefit to the customers will be what fair competition brings to the table better products, better service, and betterment of life,” said Mutiso.