What Does Kenya’s Introduction of 20% Excise Tax for Digital Lenders Spell for Kenyans and Startups?

What Does Kenya’s Introduction of 20% Excise Tax for Digital Lenders Spell for Kenyans and Startups?

Digitalization has enabled businesses conduct business in locations where they do not have a physical presence. Tax laws are easier when they are based on a physical presence attributable to a permanent establishment rather than a virtual one. As a result, efficiently taxing the digital economy has become a critical consideration for tax authorities worldwide.

In Africa, specific countries have unique tax regulations for startups. These regulations are distinct because they help address specific challenges that arise from the digitalization of the economy. For example, in January 2021, Kenya began levying a 1.5% tax on income earned through a “digital marketplace,”. In Zimbabwe, annual gross income from satellite broadcasting services in respect of the provision or delivery of television or radio programs, as well as e-commerce operators providing or delivering goods or services to persons resident in Zimbabwe, that exceeds $500,000 is taxed at a rate of 5%, beginning on January 1, 2019. Nigeria levies corporate income tax at a standard rate of 30% on taxable income derived from broadly defined “digital services.”

On Monday, 6th of June, Kenya’s government announced plans to levy a 20% excise tax on all fees charged by digital lenders on loans. Financial startups and providers of banking services like M-Shwari KCB-Mpesa, Branch and Tala are provider of digital loans.

Interestingly, traditional credit providers such as banks and micro-financiers will pay the excise tax alongside digital lenders.

Members of parliament have until today, Thursday, June 9, 2022, to debate the proposal.

Digital Lenders’ Excise Tax can’t be Good

It appears like the Central Bank of Kenya wants some extra ‘piece of the pie’. Kenya’s digital lending is growing at a rapid pace. A study carried out by GeoPoll in 2019 reported that 71% of over 4,000 total respondents reached had taken out a mobile loan in the past 6 months. The study also reported that consumers are drawn to the convenience of mobile-based lending.

Prior to this, the Kenyan Parliament and the Central Bank of Kenya had in 2021 approved Bill which bestowed the Central Bank with the power to regulate digital lenders. The approval also subjected digital lenders to the Data Protection Act. In this way, the apex bank could prevent lenders from violating users’ privacy through debt-shaming.

However, the 20% excise tax will adversely affect millions of Kenyans and businesses prioritizing the use of digital loan apps. Digital loan companies and banks are businesses, not charity organisations. They always find ways to recuperate profits, even if it means over-milking the cow (customers). A 20% tax is most likely to attract an increased interest rate. This condition will stiffen an already stiffened credit culture and impair the growth of businesses in the country.

The intentions of the new tax policy might have been clear, but the consequences haven’t been well thought-out.