Digital lenders take to court to challenge 20% excise tax
On Thursday, digital lenders went to court demanding the removal of the 20% excise tax on loans made to online borrowers, setting it on a collision course with the new government.
Through their apex body, Digital Finance Services Association of Kenya, the lenders want the court to suspend further implementation of the Excise Duty Act as amended by the Finance Act 2022, pending the decision on the prosecution.
The 20% tax on fees levied on all digital loans was introduced following a 2015 excise duty amendment to the Finance Act.
Fintech lenders want the court to issue orders prohibiting the IRS from collecting or demanding payment of excise duty on fees charged on loans. The new law came into force on July 1, 2022.
Through lawyers Faith Macharia and Ikoha Muhindi, the association says it has filed a lawsuit because its members are required to account and pay excise duty for July 2022, the first month in which the disputed amendment became operational on Saturday of this week.
Digital loans are defined as credit obtained through mobile banking services such as M-Shwari and KCB-M-Pesa or smartphone apps such as Branch and Tala. Airtime advances and other forms of digital borrowing such as Safaricom’s Fuliza overdraft facility are excluded.
The imposition of the tax has increased the cost of mobile loans such as KCB M-Pesa and M-Shwari and Fuliza, jointly owned by Safaricom and NCBA Group.
The excise duty on normal loan charges is expected to earn the Kenya Revenue Authority (KRA) over 7 billion shillings a year.
The association is challenging the new tax on the grounds that it unfairly discriminates against its members (digital lenders) compared to other financial institutions.
“As a result of the contested amendment, digital lenders are being denied the legal benefits of excluding interest from the tax base for the applicable 20% excise duty on transactions with their customers – a benefit enjoyed by other financial institutions, including non-digital lenders. under the Excise Duty Act,” the association explains.
Justice Hedwig Ong’undi ordered the association to provide the respondents – the National Assembly, the Kenya Revenue Authority and the Attorney General as well as the Law Society of Kenya – with the petition. The case will be discussed on August 22, 2022, for direction.