Excise Duty on Other Fees Charged by Financial Institutions in Kenya
What is Excise duty?
Excise duty is an indirect tax that is levied by the government on certain goods and services. This is
guided by the Excise Duty Act of 2015
Over time, excise duty has been treated as a sin tax. This is because, since its introduction, excise duty was only applicable to detrimental or non-essential supplies in the society, e.g. alcoholic drinks, beverages, gaming activities as well as the competing products that are imported into the Kenyan market. This tax aimed to discourage their consumption and shield the local market. However, this notion has eroded over time as we have seen excise duty being extended to other essential sectors in the market such as manufactured products, the insurance sector, the financial sector, etc. This could be fueled by the government’s aim of meeting the revenue target through taxes.
What is a financial institution?
The Excise Duty Act defines a financial institution as;
- A person licensed under; the Banking Act, the Insurance Act, the Central Bank of Kenya Act, or the MicroFinance Act, 2006, or
- A Sacco Society registered under the Sacco Societies Act, 2008, or
- A person licensed under the Kenya Post Office Savings Bank Act.
Evolution of other fees
The excise duty on other fees was introduced back in 2012 under the Customs & Excise Act. The Finance Act, 2013 brought clarification by defining what ‘other fees’ entails. However, this still faced interpretation challenges on whom to bear the excise duty obligation. Through lobbying, the Excise Duty Act of 2015 was drafted and enacted. Through the Finance Act, of 2018, the rate applicable on other fees was raised from 10% to 20%.
The Finance Act, 2019 redefined ‘other fees’ excluding from tax interest on a loan, return on loan, or commissions earned in respect of a loan or any share of profit or an insurance premium or premium- based or related commissions specified in the Insurance Act or regulations made thereunder.
The Finance Act 2021 amended the definition of ‘other fees’ by deleting the words, “fees or
commissions earned in respect of a loan.
Currently, other fees is defined as follows;
“It includes any fees, charges, or commissions charged by financial institutions relating to their
licensed activities, but does not include interest 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
Common charges by finance institutions that are subjected to excise duty include; registration fees, account maintenance fees, withdrawal fees, loan application, processing fees, etc. Excise duty applies to other fees charged by these financial institutions at the rate of 20%. The deadline for filing and remitting excise duty is on or before the 20th day of every following month. Non-compliance with these deadlines will attract penalties and interest at the rate of 5% and 1% per month for the period that excise tax remains due.
Excise Duty on Financial Institutions: Proposals under the Finance Bill, 2023
The Finance Bill, 2023 proposes the deletion of the words, “relating to their licensed activities” appearing in the definition of other fees. The phrase “relating to their licensed activities” is a qualifier that narrows down the scope of fees, charges, or commissions to those specifically charged by financial institutions to their licensed activities.
By removing this qualifier, the definition would encompass any fees, charges, or commissions charged by financial institutions, regardless of whether they are related to their licensed activities or not. This would result in a broader interpretation of “other fees” that includes a wider range of charges, potentially extending beyond the scope of fees typically associated with financial institutions’ licensed activities.
Currently, the excise duty on fees charged for money transfer services by banks, money transfer agencies, and other financial institutions is levied at the rate of 20% of their excisable value. The Finance Bill, 2023 proposes to reduce this to 15%. This will reduce the cost of accessing finances by their respective members.
There have been attempts to clarify the scope and obligations surrounding the excise duty and adjustments to the duty rate and exclusions from taxation. The term “other fees” has undergone progressive review under the Legislature and amended over time to curb ambiguity, and misinterpretation, and mitigate contentious disputes with the taxpayers. These changes introduced through various Finance Acts reflect the government’s efforts to refine the indirect tax structure related to other fees and adapt it to evolving economic circumstances.
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