Expand tax relief to sacco, micro-finance home loans

Because sacco membership is no longer restricted, contributors should enjoy the tax relief on mortgages; this should be extended to micro-finance institutions. PHOTO | FILE 

By IBRAHIM KHALIF

The employees whose salaries are subjected to the statutory monthly Pay As you Earn Tax (Paye) will pay a little less tax this month.

The reduction mentioned above is courtesy of a 10 per cent increase in individual graduated rates of tax and personal reliefs that remained unchanged since 2005.

These changes have increased the monthly tax-free income from Sh11,135 to Sh12,260.

However, the impact of the change will not be felt by the affected employees due to the negligible amount of disposable income the change leaves in their pockets.

Depending on the level of salaries, the saving will buy the low income earners only two packets of 500ml milk and one 400-gramme loaf of bread while the high income earners will get six packets of 500ml milk and six 400- gramme loaves of bread.

While the change highlighted above cuts across all individual taxpayers, a category of taxpayers is going to “laugh all the way to the bank’’ come end-month, thanks to the doubling of the mortgage interest relief provided under Income Tax Act which changed from Sh12,500 per month to Sh25,000 per month, resulting in additional disposable income of up to Sh3,750 per month.

Contrary to media reports, Savings and Credit Co-operative Societies (saccos) and microfinance institution (MFIs) borrowers will not benefit from the relief because they do not fall under categories whose home loans qualify for the relief.

Currently, only borrowings from a bank licensed under the Banking Act, an insurance company, a building society and the National Housing Corporation (NHC) qualify for the relief.

Borrowers under NHC’s tenant purchase scheme started enjoying the relief less than 10 years ago.

Denying borrowers under MFIs and saccos the relief is inequitable as it contradicts one of the principles of a good tax system.

The equity principle provides that people in similar circumstances should be subjected to similar tax treatment.

Ironically, saccos qualified as the fourth specified financial institutions whose home loan interest qualified for mortgage relief before a change was made in 1992 to disqualify them.

The reason given for the disqualification was that they were included in the list inadvertently as the borrowings are restricted to only members of a specific co-operative and not to the public at large.

However, with the changes in sacco societies’ landscape where the asset base, deposits and memberships have grown significantly over the years, the justification given then may not hold water anymore.

This is due to the fact that saccos representing various interest groups have spread to every corner of our country and membership is no longer the preserve of a few. Studies by FSD Kenya shows presence of saccos and MFIs in 85 per cent of the counties in Kenya, resulting in only four counties not represented.

Further, CBK’s 2015 Financial Stability Report showed that deposit-taking saccos commanded asset base in excess of Sh 340 billion and deposits in excess of Sh237 billion.

The above figures could increase significantly when the numbers for non-deposit taking saccos, which are in the majority, are included.

As a tax practitioner who occasionally pens thought leadership pieces on tax policy and administration in Kenya, I have been at the forefront in advocating for the expansion of the list of specified financial institutions to include saccos and MFIs. However, my pleas have fallen on deaf ears.

There’s light

There seems to be light at the end the tunnel especially for sacco borrowers as their plight has attracted the attention of the highest office in the land, with the President commenting on the inequity they have endured for a long time.

While launching the Kenya Police Sacco i-Cash system on December 17 , the President said that the law will be amended in the next financial year to give tax relief to saccos just like other financial institutions, which give mortgage loans.

Consequently, the saccos fraternity will keenly be watching the next financial year’s budget speech to see if the President’s directive will be implemented.

Incidentally, this year’s speech will be read in April due to the fact that Parliament business ends in June due to the elections in August.

While at it, the policy makers should also consider including both deposit-taking and non-deposit taking MFIs in the specified institutions whose home loans qualify for tax relief as they are considered to be financial institutions with some of them even described as micro-finance banks.

Finally, if the amendment is made, it would be godsend for the beneficiaries if it is effected retrospectively from January 1, 2016 or made to take effect on July 1, 2017 as opposed to the tradition of tax changes affecting individuals taking effect at the start of the following calendar year.

The writer is senior tax manager, Deloitte East Africa.