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Digital lenders move to court to challenge 20 percent Excise Tax

The first schedule to the Excise Duty Act 2015 was amended by inserting the following proviso, “excise duty on fees charged by digital lenders at a rate of 20%.” Digital loans are defined as credit obtained via mobile banking such as M-Shwari and KCB-Mpesa or a smartphone app such as Branch and Tala.

The digital lenders through the Digital Lenders Association of Kenya (DLAK) moved to court seeking the revocation of the 20 percent excise tax on fees charged on all digital loans. The law came into operation on 1st July 2022 following the amendment to the Excise Duty Act, 2015. The association is disputing the new tax on grounds that it unfairly discriminates against its members (Digital lenders) as compared to other financial institutions. The digital lenders are denied the statutory benefits of excluding interest from the tax base for the 20 percent excise duty applicable on transactions with their customers- a benefit which other financial institutions, including non-digital lenders, enjoy under Excise Duty Act.

The effect of the tax imposition is the increase in the cost of the mobile loans, and this would in turn affect the intake of the short-term credit facilities. The orders and direction that the court will give on the matter will have a great impact on the fintech industry. We will keep monitoring progress and developments in this regard and advise on the directions the court will give.

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