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What repealing income tax could mean for Saccos

Joseph Kigotho @PeopleDailyKe

The current tax law has its shortcomings especially on taxation of income of Savings and Credit Societies (Saccos) that operate both Front Office Savings and Credit services (FOSA) and Back Office Savings and Credit Services (BOSA) and whose membership comprise individual and corporate persons.

There has also been a lot of controversy as to what constitutes interest from members thereby qualifying for tax exemption.

So, what does the Income Tax Bill have in store for the co-operatives in the country? A quick review of the Bill indicates a cocktail for the sector with both positive and somewhat negative provisions. The Bill proposes to tax 100 per cent of interest income earned by a sacco from other sources other than from its members, this is an increase of 50 per cent.

The provision is likely to erode the gains made in the sub-sector as it will automatically result in an increase in the effective tax rate. An increase in the rate of taxation means that less is left to plough back into the sub-sector. This will probably affect cash flow of saccos with an adverse effect to the economy as saccos would have less cash to offer to members as credit.

The provision to impose a 10 per cent withholding tax on bonuses and dividends paid by a co-operative society to its members is not only unfair, but discriminatory and not pro-“Wanjiku” since payment of dividends by any other institution will be subject to withholding tax at five per cent. Increase from five per cent to 10 per cent is not in line with the government’s plan to make credit more available and affordable to the wider masses for investment purposes.

The increase in the rate of withholding tax will result to more people saving less with the co-operatives as their income from such investments attract a more punitive taxation rate compared to the income earned from other financial institutions and investments which in most instances are not easily accessible by “Wanjiku”.

To spur growth, and facilitate accessibility of credit to Kenyans, the proposal to tax 100 per cent of interest other than that from members should be removed and replaced with either the current one or a hybrid.

The Bill could also be drafted in such a way that all incomes earned by a co-operative from its dealings with members is exempted from taxation since a co-operative belongs to members and it only trades with members, thus you cannot trade with yourself.

The imposition of 10 per cent withholding tax on bonuses and dividends should therefore be withdrawn or remain at five per cent in line with the tax rate applied on other sectors.

Joseph Kigotho is a senior tax consultant at EY. Views expressed herein are not necessarily those of EY.

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