Proposed VAT on financial services to push costs up, experts warn

Tax experts are cautioning of likely negative economic effects if Kenya adopts the proposed introduction of Value Added Tax (VAT) on excisable financial services.

An excise tax is any duty on manufactured goods levied at the point of manufacture for internal consumption rather than at sale. The fee must be paid in order to consume certain products.

Tax experts from Price Waterhouse Coopers (PwC) warn that adding VAT on top of excise duty will create a compounding tax effect, ultimately burdening consumers.

PwC Kenya’s Senior Manager for Indirect Tax Services, Michael Wachinga, said that the current 15 per cent excise duty on money transfer fees would be subjected to an additional 16 per cent VAT.

“The proposed introduction of VAT on excisable financial services is bound to have a cascading tax effect. This is because VAT is generally levied on the excise-inclusive value of services or goods. The imposition of both VAT and excise duty on the same transaction places a significant burden on the final consumer,” said Wachinga.

This, he says, would effectively result in an 18. 4 per cent additional tax, leading to a total tax impact of 33.4 per cent on these transactions.

However, PwC says international best practices highlight the difficulty of applying VAT on financial services, primarily because of the difficulty in measuring the value add associated with financial services and consequently the tax base for which VAT should be applicable.

Wachinga in the PwC East African Financial Sector focus report warned that this could contradict the government’s broader agenda of financial inclusion, particularly as digital financial services continue to expand in Kenya.

The experts argue that transactional taxes are regressive by nature, as they do not differentiate based on the ability to pay, applying the same rate across all income groups.

Consequently, lower-income groups are more adversely affected since a larger portion of their income goes towards tax payments compared to higher-income earners.

PwC Kenya Senior Associate for Indirect Tax Services, Doreen Max, argues that policymakers should be alive to the adverse effects of levying both excise duty and VAT on financial services, which has the potential to negate the government’s efforts in relation to financial inclusion.

She says the rise of fintech and digital financial services presents new opportunities to serve the previously marginalized population but also represents employment opportunities for Kenyans, especially the youth.

“As technological innovations evolve, policymakers need to adopt a forward-looking approach that embraces technological advancements, especially those that support the government’s agenda of financial inclusion and job creation,” she said.