Banks have increased excise duty on money transfer charges to 20 percent in line with the Court of Appeal's nullification of the Finance Act 2023, highlighting the compliance chaos as the government continues to ignore orders calling for lower taxes on fuel and salaries as was ordered by the same court.
The lenders have issued notices to their customers, informing them of the rise in the excise duty from 15 percent and said that they will backdate the implementation to the effective date of August 1. They will recover the incremental five percent by debiting customers’ accounts for transactions that have been charged at 15 percent since the month started.
The banks' move comes after the court rewinded Kenya's tax regime to the provisions of the Finance Act 2022, coming in the wake of the government's suspension of the Finance Bill 2024, which sparked protests for proposing more and higher taxes.
Kenya Bankers Association (KBA), the umbrella body for commercial banks, told this publication its members had taken the decision to avoid running into tax wars with the Kenya Revenue Authority (KRA).
The banks’ position, however, comes at a time when the government has continued to ignore other aspects of the July 31 Court of Appeal judgment that declared the Finance Act 2023 unconstitutional.
The court said the Constitution was regularly ignored in passing the law in, among others, introducing items not subjected to public participation.
“As an industry, we are moving by the law and that is how we have advised our members. We have communicated this in writing to all banks,” said Raimond Molenje, acting chief executive at KBA in a phone interview.
“If KRA comes to our members to claim the taxes, the applicable law now is the 2022 Finance Act. The unfortunate bit is that KRA has not pronounced itself on it and also the government has left people in limbo. Government itself has not adjusted the taxes to reflect the court’s declaration. That is the dilemma now for banks and private individuals and companies.”
The government has continued to ignore the court orders that would also have seen the value added tax on petroleum products halved to 8.0 percent from the current 16 percent and also scrapped new pay-as-you earn (PAYE) tax bands of 32.5 percent on income of between Sh500,000 and Sh800,000 and 35 percent on earnings above Sh800,000.
The government, through the Solicitor-General, appealed the court's decision, seeking immediate stay orders, which were denied. The Supreme Court is, today Tuesday, expected to make a ruling on the stay order application by the government.
Federation of Kenya Employers (FKE) executive director Jacqueline Mugo on August 9, in an open letter to the KRA, sought clarity over which tax bands to use in taxing workers’ pay, noting that the taxman had not updated its system to scrap the two unconstitutional tax bands.
The FKE is concerned that its members are exposed to KRA penalties for not using this tax band yet they are also facing lawsuits from workers for taxing them using bands that had been thrown out by the Court of Appeal. The private sector firms fear that while the government has had a history of disobeying court orders and getting away with it, they risk the public and courts’ wrath if they tried to borrow a leaf from the book of the State and its agencies such as the Energy and Petroleum Regulatory Authority (Epra).
Epra, which on July 1, 2023 doubled VAT on fuel despite a court order that had suspended Finance Act 2023, has dragged its feet on cutting the tax to eight percent, yet again disobeying another court order. The regulator has also ignored another court order that last week suspended the implementation of the Sh7 rise in road maintenance levy (RML) to Sh25 pending an August 28 hearing.
“For Epra and the entire government, somehow they have the leeway to actually disobey court orders because that aspect of how to punish seems to be a very difficult process. For us, KRA will just cite to us the law and demand the taxes,” said Mr Molenje.
By ignoring the court order, the government has exposed taxpayers to unlawful deductions even as entities such as Epra said they were awaiting official advice from the Attorney-General (AG). Dorcas Agik Oduor, the nominee for the AG position, has been cleared by Parliament but is yet to be sworn in.
The 16 percent VAT charged on fuel has accounted for more than Sh20 per litre in most pricing cycles. Resetting the tax to 8.0 percent was expected to cut its impact by more than Sh10 per litre. The relief would have been larger had Epra suspended the Sh7 per litre RML hike as was ordered by the High Court last week.
High-earners on the other hand have been denied savings amounting to thousands of shillings that they have been deducted since the expansion of the tax bands started in July 2023.
The government, which in June shelved Finance Bill 2024 after anti-tax protests pressure and therefore foregoing Sh346 billion potential additional revenue in the current financial year, is keen to defend the tax revenues in the Finance Act 2023 and even try to reintroduce some of the taxes that had been proposed this year.
