In the complex world of economic policy, every decision carries profound implications for society. The recently published Finance Bill, 2024, proposes a 16% Value Added Tax (VAT) on financial services—a policy change that threatens to impede financial accessibility and stability. It is essential for citizens, who will be directly affected, to scrutinize this proposal with clarity and foresight.
Financial services are the backbone of economic growth, facilitating savings, investments, and lending activities essential for individual prosperity and national development. Imposing VAT on these services would not only place an additional financial strain on consumers but also hinder access to financial resources.
Since Kenya introduced its VAT framework 34 years ago, financial services have been intentionally exempted to promote financial inclusion. This exemption has significantly increased financial access—from 27% in 2006 to 84% in 2021, according to the latest Financial Access Household Survey (Fin-Access). This impressive growth is largely due to effective policies and substantial investments by the banking sector in digital platforms and technology.
Impact of More Tax on financial services
Introducing VAT on financial services in Kenya could also derail financial literacy and inclusion initiatives, as consumers might turn to informal financial services, perpetuating financial exclusion. This not only undermines efforts to combat financial crime and promote transparency but also stifles economic empowerment, particularly among marginalized communities.
At this crucial stage of Kenya’s economic development, policymakers should focus on bridging the 16% of the population still excluded from formal financial access. The proposed VAT could disproportionately affect low and middle-income individuals, exacerbating existing financial disparities. Currently, financial services are subject to a 15% Excise Duty, with a proposal to increase this to 20%. Adding 16% VAT would result in a staggering 40% tax burden on financial services.
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Such a substantial increase, especially in the current challenging economic environment, might push consumers to avoid formal financial services, opting instead for less taxed options like cash transactions. This shift could undermine financial security for those already struggling with limited incomes or debt obligations, contradicting the principles of equitable economic policy and inclusive growth. In most jurisdictions where VAT on financial services exists, Excise Duty does not apply, and VAT is not levied on transactions.
Negative Economic effect
Moreover, VAT on financial services could hinder economic growth and investment. Increased transaction costs might force businesses to cut back on investment plans, dampening economic activity and job creation. In a global economy, such measures risk eroding competitiveness and deterring foreign investment, impeding long-term prosperity.
The imposition of 16% VAT on foreign exchange transactions would adversely impact Kenya’s international trade. For the first time, exports would be subjected to VAT, taxing farmers’ export proceeds. Imports, already subjected to VAT at importation, would incur additional VAT when settling supply obligations through foreign exchange transactions, further burdening consumers. Similar impacts would be felt on fuel prices and foreign remittances, increasing costs for end consumers.
Kenya on Grey List
Kenya’s recent inclusion on the “grey list” by the Financial Action Task Force (FATF) due to deficiencies in its anti-money laundering and counter-terrorism financing (AML/CFT) framework further complicates the situation. Imposing VAT on financial services could alienate financial transactions from the formal system, weakening the country’s AML regime.
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Critics might argue that VAT on financial services is necessary to bolster government revenues. While fiscal sustainability is crucial, alternative avenues should be explored that do not compromise financial accessibility. Policymakers must prioritize efficiency gains, streamline tax administration, and combat tax evasion to bolster revenue without unduly burdening the populace.
In conclusion, the proposed VAT on financial services is a misguided approach that undermines financial accessibility, economic inclusivity, and long-term prosperity. Policymakers must safeguard the integrity of financial systems and prioritize the interests of all stakeholders. Let us advocate for policies that promote economic empowerment, foster financial inclusion, and uphold social equity. The aspiration for a future where financial accessibility remains a cornerstone of societal progress is under threat if the VAT proposal on financial services is upheld.
This opinion piece was written by Mr. Raimond Molenje, the Ag. Chief Executive Officer of the Kenya Bankers Association.
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