Digital Lenders Association of Kenya has announced plans to increase charges for borrowers as digital lenders begin effecting the proposed 20 percent excise tax on all credit facilities taken by borrowers starting July 1, 2022
DLAK Chairman Kevin Mutiso said small businesses dependent on short-term loans to grow will be the hardest hit as the new tax will be loaded into the pricing and transferred to the consumer as a cost.
The lobby said all its members currently licensed under the new digital lending regulations and those yet to get an operating license will be required to remit the excise tax to the Kenya Revenue Authority on behalf of borrowers from next month.
“The proposed change affects all digital loans from July 1 as we will be required to effect excise tax which is a percentage of fees levied on borrowers for services rendered by the lenders,” Mutiso said.
The current Excise Duty Act defines “other fees” to include fees and commissions for licensed lenders- meaning any fees, charges or commissions charged by financial institutions relating to their licensed activities. This widens the bracket on costs, meaning the borrower will be charged more when the final computation is done.
The deductions will however not include interest on a loan or return on a loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations- therefore interest is excluded from the deductions.
According to the State of Digital Lending in Kenya Report 2021, by consumer intelligence firm Reelanalytics, the majority of Kenyans place digital lending platforms top on their priority list of credit sources to fund the growth of small businesses.
Further, the report shows that in the absence of digital lending platforms, most Kenyans would seek business growth loans from sources such as close family members.
Digital lenders are required to deduct the new tax based on “time of supply”, which shall be before the service is performed before the invoice for the supply of service is issued or cleared either in part or whole before the payment date for the services received by borrowers.
“The tax point for excise duty is determined by “time of supply” as per the Excise Duty Act,” added Mutiso.
All licensed digital lenders will no longer be subjected to thin cap rules as they would be deemed as financial institutions.
The Finance Bill 2022 proposes to introduce a Country-by-Country reporting (CbCR) requirement on any Kenyan-headquartered multinational enterprise group (MNE) with a gross turnover of KShs. 95Billion and this could increase the final cost to the consumer.
“The MNE will be required to notify the Commissioner not later than the last day of the reporting financial year of the Group whether it is the UPE or Surrogate entity in the Group or the tax resident of the constituent entity that is the UPE or surrogate entity in the Group,” he said.
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