The tax will push up interest rates and other fees paid by borrowers for digital loans, including those that were not previously regulated by the Central Bank of Kenya (CBK).
The first schedule to the Excise Duty 2015 was amended in the Finance Act, 2021.
Lenders are required to deduct the new tax based on “time of supply”, which shall be before the service is performed.
A digital loan is a credit obtained via mobile banking such as M-Shwari and KCB-Mpesa or a smartphone app.
The law excludes airtime advances and other forms of digital borrowing such as Safaricom’s overdraft facility Fuliza.
The Digital Lenders Association of Kenya said all its members currently licensed under the new digital lending regulations and those yet to get an operating license will from next month have to remit the Excise Tax to Kenya Revenue Authority on behalf of borrowers
“The proposed change affects all digital loans from 1st of July as we will be required to effect excise tax which is a percentage of fees levied on borrowers for services rendered by the lenders,” said DLAK chairman Kevin Mutiso.
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 final computation is done,’’ Mutiso said.
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.
“Excise Duty is usually a cost to the final consumer. This means it is loaded in the pricing and transferred to the consumer as a cost. Digital lenders will be responsible for Excise Duty submission to KRA,” Mutiso said.
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 credible sources to fund the growth of small businesses.
According to the survey, for every 100 Kenyans interviewed, 55 took a digital loan in 2021, a clear case for the existence of this service and the exponential growth in the number of businesses and Apps offering loans.
This is driven by growing access to mobile phones, which grew to reach 59.2 million connections or a 109 per cent penetration rate.
According to the law, all licensed digital lenders will no longer be subjected to thin cap rules, as they would be deemed as financial institutions.
It has also introduced a Country-by-Country reporting (CbCR) requirement on any Kenyan-headquartered multinational enterprise group (MNE) with a gross turnover of Sh95 billion 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.
