Digital Lenders Reject 20% Excise Duty Proposal on Loan Interests

Digital lenders have rejected a proposal requiring them to remit a 20 percent excise duty on loan interest.

While giving their submissions on the proposed Finance Bill 2023 before the National Assembly Finance Committee, they said that the new tax is discriminatory since other financial institutions are only required to pay the tax on 'other fees'.

This is also coming on the back of tough economic times amid high inflation.

"This means that while Digital Lenders are paying Excise Duty on interest on digital loans, other financial institutions including banks are not," Digital Financial Services Associations of Kenya (DFSAK) chairman Kevin Mutiso said.

Mutiso gave an example of bank interests, insurer premiums, and insurance broker premium commissions whose incomes are exempt from the tax.

While digital lenders have excise duty charged on any amount that they charge in respect of lending, which includes interest on loans, other financial institutions only have excise duty charged on 'other fees'.

"This leads to a lopsided market favoring other financial institutions over digital lenders when both sets of institutions provide the same service to the citizens of Kenya," Mutiso stated.

"The extra expense borne by Digital Lenders as a result of this makes it more difficult for them to compete with other financial institutions as they have a higher tax obligation."

The proposal will deter the innovation of FinTechs in the country, make credit access costly for about 8 million citizens who cannot access formal or conventional forms of credit, and disrupt consistency in tax collection.

'Either the Financial institutions are subject to the same regime that digital lenders are subject to and they add upto KES 100 billion in additional tax revenue or we are subject to the same tax rate as them and we let FinTech continue thriving in Kenya," DFSAK Char indicated.

"It also makes credit more expensive to the cadre of Kenyans served by Digital Lenders as opposed to those served by other financial institutions, creating a superfluous economic disparity negatively affecting the bottom of the pyramid," according to the association.

DFSAK are pushing legislators to amend the provision by leveling the playing field, including a decision to compel the banks to pay the levy on all credit to promote free-market economics in lending.

"All financial institutions (both traditional and digital lenders) will have the same cost of credit and will have to rely on innovation and customer satisfaction to thrive," Mutiso revealed.

"The benefit to the customers will be what fair competition brings to the table better products, better service, and betterment of life."