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Finance Bill 2024 proposes 16% VAT on financial transactions

Kenya Bankers Association protests 16% VAT on financial transactions in Finance Bill 2024

A farmer using their phone to transact

The Kenya Bankers Association (KBA) has raised serious concerns over the proposed imposition of a 16% Value Added Tax (VAT) on financial transactions, as outlined in the Finance Bill 2024.

KBA is urging the government and the National Assembly to reconsider this proposal, highlighting its potential negative impacts on consumers and the broader economy.

KBA emphasised that while VAT applies to payments for goods and services, bank charges are fundamentally different as they are not direct payments for goods but rather cost recoveries.

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"Since banks are not delivering any goods to customers, bank charges are not considered VATable. Kenya has, until now, held this principle to be true!" bankers said in the statement shared on May 17.

The Finance Bill 2024 also introduces VAT on a range of financial services, including:

  • Issuing credit and debit cards
  • Telegraphic money transfers
  • Foreign exchange transactions
  • Cheque handling
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KBA warns that these changes will significantly increase the cost of banking for consumers, particularly affecting low-income individuals and small businesses.

The bankers argue the combined effect of VAT and existing Excise Duty could push the total tax burden on financial services to 40%, up from the current 15% (Excise Duty only).

The proposed VAT on foreign exchange (FX) transactions poses additional risks.

KBA cautions that this could widen the margin charged on FX transactions, hindering economic growth by taxing export proceeds and affecting the competitiveness of Kenyan products.

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The tourism industry, a key sector for foreign investment, could also suffer, jeopardising long-term economic stability.

"The VAT application on FX transactions would also result in increased costs, including fuel prices, reversing efforts and progress made in stabilising the cost of living," KBA points out.

While KBA supports the government's efforts to boost revenue collection to meet national development needs, it calls for a balanced approach.

Excessively burdening customers could undermine well-grounded banking principles and hinder economic progress.

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KBA has extended an invitation to the government and the National Assembly for a dialogue to explore viable alternative revenue-raising measures that would foster economic growth and financial stability without overburdening the banking sector and its customers.

"We advocate for the financial industry's inclusion in collaborative efforts to ensure a conducive environment for sustainable economic prosperity in Kenya," said Raimond Molenje, the Acting Chief Executive Officer of KBA.

The debate over the Finance Bill 2024 and the proposed VAT on financial transactions continues to unfold.

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