Kenya Union of Savings & Credit Co-operatives Ltd (KUSCCO) has presented their memoranda on tax matters affecting Saccos in Kenya where they have said that there will be implications under the current tax law provisions.
Saccos with corporate members would lose the tax benefit of exemption. Interest income from members and 50% for the interest arising from other investments including deposits in financial institutions and investment in bonds.
The ITA ignores the distinct characteristic of SACCOS as spelt in both the Co-operatives Societies Act and the SACCO Societies Act. Sacco business is defined in the SACCO Societies Act. Section 16 of the Co-operatives Societies Act allows all co-operative societies to have membership of companies incorporated in Kenya and unincorporated body of persons upon receiving approval through a resolution by a general meeting.
KUSCCO has proposed that to ensure the tax policies align with business practice amendment of Section 19A (3) by deleting the phrase other than a designated primary society which is registered and carries on business as a credit and savings Co- operative Society to which provisions of subsection (4) apply. Section 19A (4) should be amended by replacing the phrase.’ designated primary society” with Co-operative society”. Section 19A (7) amend the definition of primary society to mean a co-operative society registered under the Co-operative Societies’ Act the membership of which includes both natural (individual) and artificial persons.
This will Increase the membership of Co- operatives thus increase the amount of tax collected through other tax head stake excise duty and withholding tax. Reduce controversies brought about by the definition of “primary society “- restrictions of membership to natural persons.
KUSCCO feels that there will be implications in payment of higher tax arising from taxation of fees and charges related to the loans. In some instances, it is construed that only interest on loans is exempt thereby ignoring other loan related charges.
They proposed that the bill Introduce a provision under Sec 19A (4) to the effect that interest from members include any charges payable in respect of a loan, deposit, debt, claim or other right or obligation including charges on account maintenance and other financial transactions. The impact will be pro decant.
KUSCCO noted that there are no clear guidelines on how the expensed amounts should be allocated to the various streams of income.
Income earned by Co-operatives registered and carrying out business of credit and savings is taxed depending on its nature. Interest from members is exempt from tax whereas only 50% of other interest income is taxable. Based on the provisions under section 15 of the ITA, such income should be matched with expenses incurred in their generation.
Since the law is not clear, the taxpayer is at liberty to choose the apportionment basis that suites his/her business circumstances which is justifiable. We note that Commissioner challenging the apportionment method applied by taxpayers.
KUSCCO proposed that ITA to be amended and include a section that provides the basis of apportionment of expenses. This will provide clarity on apportionment of expenses and reduce unnecessary controversies.
KUSCCO said that Cooperative society section 19 A gives the commissioner absolute powers in deciding how a Co-operative should be taxed. This creates room for uncertainty negating the core principles of taxation (Canons of taxation).
They proposed that section 19A be amended to read. This section shall apply to designated co-operative societies other than a society which has been exempted from all the provisions of the Co-operatives Societies. This will ensure that Commissioner’s discretion powers are within the provisions of the ITA and Fair Administrative Action Act.
The change in definition to read other fee in the finance bill proposal will mean that financial institutions including SACCOs are expected to charge excise duty on all fees, charges or commissions which are not deemed to be interest. The proposal will inevitably lead to imposition of excise duty on incomes that are not related to licensed activities such as rent charge, income on sale goods (marketing merchandise, photocopying services, and tender fees among others). The expansions of the scope of other fees is likely to impact on financial inclusion & innovation which is counterproductive to the economy
KUSCCO proposal is that deleting of clause 43(c)(ii) of the Finance Bill,2023 to retain the definition as it is currently, where excise duty is only charged on other fees relating to licensed activities. This will enhance financial inclusion and innovation through access to affordable (cheap) financial services
KUSCCO has proposed that clause 36 of the Finance BilI, 2023 be deleted to ensure taxpayer’s access to justice and just resolution of tax disputes. Enhance fairness in tax administration. To avoid an unfair administrative burden on taxpayers. Increase investors’ confidence level In the Country.
KUSCCO however noted that a taxpayer will now be required to account for VAT on compensation for loss of taxable supplies. This proposal goes against the principle of indemnity whose main motive is to the insured in the same position financially as they were before the loss. The compensation does not relate to any value addition by the insurance and in most instances the compensation is always lower than the claim submitted by the insured because the insurer will thoroughly inspect and calculate the losses based on other factors.
In addition, the compensation is not a consideration for a supply and therefore this should not be deemed to be a taxable value for VAT purposes.
KUSCCO is of the opinion that the proposal should be deleted so as to preserve the principle of insurance compensation.
By Felix Wanderi
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