Digital Lenders to Charge More as KRA Effects Excise Duty on Borrowers

Borrowers from digital lending apps are set to pay more after a directive to effect excise tax on loans from August this year. The Digital Lenders Association said all its members who are licensed under the new digital lending regulations and those seeking to obtain operating licenses will be required to remit excise tax to the Kenya Revenue (KRA) Authority on behalf of its borrowers.

“The proposed change affects all digital loans from 1st of July as we will be required to effect excise tax which is a percentage of fees levied on borrowers for services rendered by the lenders,” DLAK Chairman Kevin Mutiso said.

Currently, Excise Duty Act is defined as “other fees” as any fees, charges, or commissions levied by financial institutions in connection with their licensed activities. This includes fees and commissions for licensed lenders. The cost band is widened as a result, increasing the amount the borrower will be charged in the final calculation.

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Digital lenders will be required to subtract the new tax based on “time of supply,” which must be prior to the service being rendered and before the invoice for the supply of service is issued or cleared, in whole or in part, prior to the date on which borrowers are required to make payment for the services received.

According to the Excise Duty Act, “period of supply” determines the tax point for excise duty, Mutiso continued.

However, the deductions will not include loan interest or loan return, any profit-sharing, insurance premiums, or commissions based on insurance premiums or related commissions as defined by the Insurance Act or regulations. As a result, interest is not included in the deductions.

“Excise duty is usually a cost to the final consumer. This means it is loaded in the pricing and transferred to the consumer as a cost. Digital lenders will be responsible for excise duty submission to KRA,” Mutiso said.

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A 2021 Digital Lending Report by Consumer Intelligence Firm Reelanalytics showed that a considerable number of Kenyans considered digital lending platforms as a priority when seeking credit for small businesses.

Due to their classification as financial institutions, all regulated digital lenders will no longer be subject to thin cap regulations. Any multinational business group (MNE) with a Kenyan headquarters and a gross revenue of KSh 95 billion will be subject to a Country-by-Country reporting (CbCR) requirement under the Finance Bill 2022, which might raise the final cost to the consumer.

“The MNE will be required to notify the Commissioner not later than the last day of the reporting financial year of the Group whether it is the UPE or Surrogate entity in the Group or the tax resident of the constituent entity that is the UPE or surrogate entity in the Group,” he said.

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