Treasury removes 20pc excise tax on bank loans

National Treasury building. FILE PHOTO | NMG

By JOHN MUTUA
More by this Author

Summary

• The Treasury has scrapped the 20 percent excise duty on bank loan fees, setting the stage for possible drop in the cost of credit to business and households.
• The removal of the excise tax is contained in the Finance Bill and will see banks save up to Sh7 billion annually on taxes generated from fees charged on processing loans.
• Bankers say the cut will ease pressure on lenders to raise loan costs given the fees that attract the excise duty account for an average of 2.5 percent of the overall lending rates.

The Treasury has scrapped the 20 percent excise duty on bank loan fees, setting the stage for possible drop in the cost of credit to business and households.

The removal of the excise tax is contained in the Finance Bill and will see banks save up to Sh7 billion annually on taxes generated from fees charged on processing loans.

Bankers say the cut will ease pressure on lenders to raise loan costs given the fees that attract the excise duty account for an average of 2.5 percent of the overall lending rates.

“The first schedule to the Excise Tax Act, 2015 is amended in part three, in the definition of ‘other fees’ by deleting the word ‘fees or commissions’ earned in respect of a loan,” the Treasury says in the Bill.

The 20 percent excise tax was introduced in 2018, triggering an increase in the cost of bank services, including loans, transfers — both local and international — over-the-counter withdrawals as well as ATM transactions and account operating fees.

The Treasury has retained the tax on other fees not linked to credit processing like obtaining account statements, and cheque clearance, signalling it is keen on lowering the cost of loans in an economic setting where the government does not control lending rates.

The government removed the cap on lending rates on November 7, 2019 after it was blamed for curbing 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 at four percentage points above the central bank’s benchmark lending for all customers, had taken out that equation and the flexibility that lenders say they need in order to accommodate customers deemed risky borrowers.

Lenders have since last year been putting pressure on the Central Bank of Kenya (CBK) to allows them to raise the cost of loans following the scrapping of lending rate controls.

The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.

An executive in one of the top banks said that the removal of the excise tax could ease the pressure on lenders to increase interest rates.

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

Lending rates dropped from 17.66 percent in August 2016 to 13.86 percent in September 2016 after the introduction of the cap and averaged 12.02 percent in February, CBK data show.

The withdrawal of that tax comes as the government grapples with how to boost revenues without hurting the poor.

Parliament will hold a vote on the tax measures in the coming days ahead of the Finance Bill automatically becoming law on July 1.

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

Lenders have contested the excise duty on fees from loans and filed a suit at the Tax Appeals Tribunal (TAT) — an independent body that decides tax disputes.

Banks have argued that fees and commissions on loans are exempted from the tax, but the KRA maintains the earnings are part of their revenues streams and must attract the 20 percent duty.

“All income earned during the loan processing are commissions and not interest based on the respondent’s opinion that interest can only accrue after the loan has been granted,” the KRA said last year.

The tax was doubled to 20 percent three years ago through the Finance Act, 2018, leading to an increase in the cost of loans and other banking services as lenders passed the cost to borrowers and customers.

Fees and commission from loans jumped from Sh20.6 billion in 2015 to Sh33.94 billion in 2019, says the CBK.