Why tax proposals in Finance Bill, 2024, should be reviewed

The financial sector is integral to the growth of the economy. The sector includes the following sub-sectors; banking, insurance, pension funds, fintech’s and Saccos among others. The sector is integral in facilitating trade and investment in the economy.

It has experienced tremendous growth in ensuring financial inclusion. To enhance financial inclusion, the sector has undergone a revolution through innovation and the emergence of fintech which has been a shift from traditional financial services.

Financial inclusion has aided access to credit, trade, and growth of small and medium enterprises (SMEs) across other sectors of the economy. The growth of SMEs correlates with growth in tax revenue collection. The financial sector is vital to the growth of SMEs through empowerment programs given to SMEs to formalise their operations.

As an intermediary sector, there should be policies to make financial services affordable contrary to which the gains made will be watered down.  In the recent past, the National Treasury has introduced or increased taxes targeting the financial sector with a view of expanding revenue collections.

The imposition of consumer taxes is likely to impact the overall cost of services which will hurt the final consumers. This is because the financial in-stitutions push the said costs to the ultimate consumer. For the longest, to promote the sector, financial services have been exempt from VAT.

The Finance Bill 2024, which is currently undergoing public participation has made a myriad of proposals that impact the financial sector.  The Bill proposes to introduce VAT on certain financial services which have been exempt at the prevailing rate of 16 per cent.

These financial services include money transfer services, use of debit and credit cards, cheque handling and other processing services, and issuance of securities for money among others.

Imposition of VAT on financial services will be counterproductive on the basis that the cost will be passed on to the final consumers.  This may push away the users which is retrogressive to the gains made towards realising financial inclusion.  Additionally, the imposition of VAT on financial services is a deviation from the fundamentals of VAT which has been a tax on the value added or transformation made on goods and services. Financial ser-vices are merely incidental services connecting the provider of the transformed goods and services and the recipient of the same. The role of the finan-cial sector is thus to facilitate trade.

Further, the Bill intends to restrict the exemption of insurance services to insurance and reinsurance premiums.

Therefore, any other services that are incidental to the insurance sector, other than insurance premiums, such as the disposal of salvage shall be sub-ject to VAT.  The proposal comes at a time when the penetration of insurance in the economy is low. This proposal will increase the cost of the services and thus discourage the uptake of insurance services.

The Bill has also proposed to raise the excise duty on financial services from 15 per cent to 20 per cent. The increase in the duty comes merely a year after the reduction of the same from 20 per cent to 15 per cent. Like VAT, excise duty is a consumer tax and therefore the tax incidence on it is borne by the consumers and not the institution.  Given the above analysis among other proposals in the Bill it is imperative that the Finance Committee of the National Assembly re-evaluates the impact of the proposals and make appropriate changes. 

Further, the proposals amplify the need for a firm tax policy that ensures the predictability of tax laws in the medium term. This will ensure that any amendment to the law is properly analysed and the relevant stakeholders are involved to align themselves to the changes.

— The writer is a Senior Tax Consultant at EY. The views expressed herein are not necessarily those of EY.