NAIROBI, Kenya – Tax experts have raised concerns about the potential economic repercussions of introducing Value Added Tax (VAT) on excisable financial services in Kenya.
They caution that the proposed policy could significantly increase the tax burden on consumers and counteract government efforts to promote financial inclusion.
Compounding Tax Burden on Consumers
PricewaterhouseCoopers (PwC) Kenya has highlighted the problematic nature of layering VAT on top of the existing 15% excise duty on financial services, such as money transfer fees.
Michael Wachinga, Senior Manager for Indirect Tax Services at PwC, explained that VAT is typically levied on the excise-inclusive value of goods and services.
“The proposed introduction of VAT on excisable financial services is bound to have a cascading tax effect. This would lead to an effective 18.4% additional tax, creating a total tax impact of 33.4% on these transactions,” said Wachinga.
Such a move, he noted, would disproportionately affect consumers, making essential financial services more expensive and hindering access for lower-income groups.
Impact on Financial Inclusion and Digital Growth
PwC’s experts argue that applying VAT on financial services contradicts global best practices due to the complexity of calculating the value added in financial transactions.
This challenge, combined with the regressive nature of transactional taxes, could derail Kenya’s strides in financial inclusion.
“Transactional taxes apply uniformly, regardless of income levels, disproportionately burdening low-income earners who allocate a larger share of their income to taxes compared to wealthier individuals,” Wachinga added.
Doreen Max, Senior Associate for Indirect Tax Services at PwC, emphasized that policies should align with the government’s agenda of enhancing financial inclusion and leveraging digital innovations.
“The rise of fintech and digital financial services presents unique opportunities to bridge the gap for underserved populations and create employment for Kenyan youth,” she said.
Need for a Forward-Looking Tax Policy
PwC’s East African Financial Sector focus report suggests that policymakers adopt a forward-thinking approach that considers the rapid evolution of financial technology.
The experts propose alternative measures to balance tax revenue generation with inclusive economic growth.
“Taxation frameworks must embrace innovation while ensuring they do not stifle the very technologies and services that foster financial inclusion and job creation,” Max said.
Key Considerations for Policymakers
- The difficulty of implementing VAT on financial services due to challenges in determining the tax base.
- The potential conflict between the proposed VAT and the government’s broader goals of financial inclusion and youth employment.
- The need for progressive taxation systems that minimize adverse impacts on lower-income groups.
The experts concluded that the proposed VAT on excisable financial services could have unintended consequences, including reduced accessibility to digital financial services and slowed economic growth, urging policymakers to reconsider the move.
