Finance Bill 2024: How the proposed tax on financial transactions will affect MSMEs

The Kenya National Chamber of Commerce head of Policy Research Kiplimo Kigeni. [Screen Grab]

Micro, Small and Medium Enterprises (SMEs) might face financial barriers if the 16 per cent proposed Value Added Tax (VAT) on financial institutions is implemented, says the Kenya National Chamber of Commerce head of Policy Research Kiplimo Kigeni.

Speaking during an interview on Spice FM on Tuesday, May 21, Kigen warned that banks could hesitate to lend to MSME operators, fearing potential losses if borrowers default.

In the proposed 2024 Finance Bill, a VAT on financial transactions covering services such as credit and debit card issuance, money transfers, foreign exchange transactions, and cheque handling has been included.

According to Kigen, if this VAT is approved, banks and other lending institutions may prefer to serve clients with collateral, effectively excluding MSMEs from loan access.

“The VAT on banking services essentially means that taxes will be applied when one is taking loans. Now as a bank, in the event where there is a default, one will not be able to recover this tax that they will be required to pay upfront. So, banks will end up lending to people who have collateral and MSMEs do not. And therefore, they will end up being locked from the lending market,” he said.

Last week, the Kenya Bankers Association (KBA) raised concerns about the increased cost of banking services for its customers.

In a press statement, KBA noted that the combination of the proposed 16 per cent tax and existing Excise Duty would result in total taxation of 40 per cent on financial services, significantly impacting affordability and accessibility.

Furthermore, the association warned that the increase will adversely affect low-income individuals and small businesses, urging Members of Parliament to the proposal.

However, President William Ruto has maintained that these additional taxes are part of a broader strategy to boost the country’s revenue and reduce reliance on borrowing.