16 July 2018

Kenya Banks Ask Court for Respite Over Treasury Taxes

Kenyan businesses and lobbies have moved to court to block the implementation of some tax proposals unveiled in the Finance Bill, 2018, putting in doubt Treasury Cabinet Secretary Henry Rotich's efforts to increase revenue collections to finance the $30 billion 2018/19 budget.

With Mr Rotich opting to fast-track implementation of the Finance Bill 2018 without waiting for parliament to debate and pass it, resulting in the new taxes coming into effect from July 1, manufacturers, banks and capital markets players are up in arms against new taxes, arguing that these taxes will significantly hurt their businesses.

Mr Rotich exploited the provisions of the Provisional Collection of Taxes and Duties Act to bring into force the new taxes and duties without going through the normal parliamentary process.

The Act says that "if a Bill is published in the Gazette whereby, if such a Bill were passed into law, any tax or duty, or any rate, allowance or administrative or general provision in respect thereof, would be imposed, created, altered or removed, the Minister may, subject to this Act and notwithstanding the provisions of any other written law relating to taxes and duties, make an order that all or any specified provisions of the Bill relating to taxes or duties shall have effect as if the Bill were passed into law."

A legal notice dated June 14, says "The Cabinet Secretary for the National Treasury and Planning orders that all the provisions of the Finance Bill relating to taxes or duties shall have effect as though the Bill were passed into law. This order shall come into effect on June 15, 2018."

The Kenya Bankers Association (KBA) has moved to court to challenge the imposition of a 0.05 per cent excise duty on bank and other financial institutions' transfers exceeding Ksh500,000 ($5,000).

Eroding investment?

The Treasury contends that the tax, together with the increase in excise duty charged on money transfer services from 10 per cent to 12 per cent, is necessary to raise revenues to fund universal healthcare.

But in its suit, KBA says that the tax, also known as "Robin Hood tax," will make it impossible for bank customers to carry out transactions, leading to substantial disruption of businesses for bank customers and damage to the economy.

The banking sector umbrella body argues the new tax measures will impact the economy and lead to erosion in investment returns of between 1.0 per cent and 5.0 per cent. This of course, depends on the nature of the fund and investment strategy, but will affect the country's Vision 2030 aspirations due to the unattractiveness of carrying out transactions in Kenya.

"There is ambiguity and lack of clarity. The terms in which the duty is imposed in such that there no definition of what constitutes "money transferred by banks," said KBA in its suit.

Capital markets players have come out in support of the banks, arguing that the tax will erode trading activity at the Nairobi Securities Exchange and could ignite a flight of foreign investors who account for 70 per cent of trading volumes at the bourse.

"The proposed tax may result in a high level of attrition of foreign investors to more cost-effective markets, which will have an adverse impact on trading at the NSE given that this segment contributes an average of 70 per cent of daily trading volumes. The resultant effect will be a depressed market and declining market capitalisation," said the capital market players.

Fact-finding mission

Confectionery and chocolate product manufacturers have also gone to court opposing the implementation of a Ksh20 ($0.2) per kilogramme excise duty on their products.

Apart from the increase in the tax rate, the affected products are also required to be affixed with excise stamps.

While the Kenya Revenue Authority has moved swiftly to implement the tax measures, manufacturers like Kenya Sweets Ltd, Candy Kenya, Kenafric Industries, Patco Industries and Mzuri Sweets have gone to court saying it will adversely affect their businesses.

The increase in duty on confectionery products comes at a time when Kenyan companies are experiencing tariff barriers in the Tanzanian and Uganda markets after the two countries refused to scrap a 25 per cent duty.

Tanzania and Uganda imposed the duty citing use of imported zero-rated industrial sugar in the manufacture of the goods.

Last week, a team of Tanzanian and Ugandan officials were in Nairobi on a fact-finding mission to establish if imported sugar is being used in the manufacturing of the products but did not commit on Kenya's demand that the duty be abolished.

"They did not give us their decision and have not given us a timeline yet. Until they do, exportation remains a concern," said Anup Bid, Kenya Association of Manufacturers beverages sector chairperson.

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