SACCOs operate based on the mutuality principle as they generate income from saving with its members thus have a unique taxation model as guided by Section 19 A of the Income Tax Act. Over the past years we have seen several litigations facing various SACCOs. Some of the grounds for litigation are majorly based on the taxable and exempt income that SACCOs earn from their operations. Some of the exempt income accrued by SACCOs include interest income earned from its members. However, the Income Tax Act provides that the following income are taxable: 50% of its gross income from interest from non-members, rental income, capital gains tax from transfer of property, and any other income. In this commentary we highlight some of the critical tax trends that affect SACCOs.
In the recent past, we have seen a litany of tax cases that involve SACCOs with regards to classification of income. Most SACCOs classify their income as either FOSA or BOSA and assume that all BOSA income is tax exempt. However, this is not the case when it comes to taxation as the Income Tax Act recognizes SACCOs’ income as either taxable income or tax exempt. Besides the interest received from loans advanced to members (BOSA), other incomes related to the disbursement of these loans to members shall be subject to tax, e.g. the fees and penalties on loan defaulting by members etc. The Courts have given rulings to this effect and the need to apportion expenses based on the ratios of taxable and exempt income.
The Finance Act 2021 introduced Excise Duty on other fees charged by Financial Institutions like SACCOs at 20% effective 1st July 2021. The following are some of the “other fees” in respect to loans that are subject to excise duty.
- Loan processing fees/commissions
- Loan disbursement fees
- Loan appraisal fees/commissions
- Loan application fees
- Loan penalty charges
SACCOs should therefore subject the aforementioned fees to excise duty and remit the same on or before 20th of the subsequent month to avoid accruing penalties and additional interest.
In the recent past we have witnessed a paradigm shift, from the previous assumption that withholding tax was due upon payment of services. In 2019, the Court of Appeal pronounced itself in a case between Fintel Vs The Commissioner, that Withholding tax is due on accrual basis and not on the date of payment. Most SACCOs are not aware of the tax point of withholding tax. SACCOs should take cognizance of the tax point and file and remit withholding tax on the 20th of every month they accrue dividends or interest payable to its members.
With the enactment of the Finance Act 2021, contributions made towards the National Insurance Fund (NHIF) by SACCOs on behalf of its primary employees are deductible for PAYE tax computation at 15% of the contributions effective 1st January 2022. Additionally, payments advanced by SACCOs to its members as honoraria should be subjected to PAYE.
Donations made to charitable organizations are allowable for corporate tax purposes effective 1st July 2022. Prior to the enactment of the Finance Act of 2022, donations made to unregistered charitable organizations were disallowed for corporate income tax purposes. This implies that SACCOs just like any other entity can now claim expenses incurred in their CSR activities that involve unregistered organizations.
SACCOs have a tendency of misclassifying incomes derived from their principal activities by grossing them with income from other sources e.g. rental income, interest income from fixed deposits, inter alia. It’s therefore paramount for SACCOs to maintain separate accounting records of the different income sources to aid in declaring bona fide income in its annual returns. Consequently, SACCOs with rental income from commercial properties ought to register for Value Added Tax in order to comply with the VAT regulations.
The commissioner, through the enactment of the Finance Act of 2022, is empowered to recover unpaid tax from defaulters and tax evaders by holding properties as security. Non-compliant SACCOs with unpaid taxes risk losing their property to the revenue authority. Property is to be defined as land or building, aircraft, ship, motor vehicle, or any other property which the Commissioner may deem sufficient to serve as security for unpaid taxes.
Finally, with the advent of technology, the financial sector has experienced a major shake-up as financial institutions with digital lending platforms tend to compete with SACCOs by issuing affordable credit. In addition, there is the growth of the micro-finance sector that has received much support from the government. For instance, these micro finance institutions will be exempt from thin capitalization, thus, they will have ease in accessing more capital through loans from foreign sources and investors.
On the other hand, we have witnessed SACCOs taking the challenge and shifting to digital space by launching digital platforms to enable them bridge the competitive advantage and provide financial services at the convenience of its members. SACCOs should therefore leverage on the digital space to minimize on its operating costs and improve on its operational efficiency to boost members’ satisfaction. These are among the major trends adopted by SACCOs that are expected to have significant influence in the tax policy framework.
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