RIITHO: Proposed tax law likely to hurt credit societies and savers - Daily Nation

Proposed law on tax likely to hurt credit societies and savers

Saturday June 16 2018

Mwalimu Co-operative Sacco Building along Tom Mboya street in Nairobi, December 6, 2009. Photo/STEPHEN MUDIARI

The Mwalimu Co-operative Sacco building on Tom Mboya Street in Nairobi. Co-operative societies, other than a credit and saving societies, will be subject to a corporation tax on total income of the year, deducting it from dividends and bonuses issued to members. PHOTO | FILE NATION MEDIA GROUP.

By ROBERT RIITHO
More by this Author

The National Treasury has reviewed the Income Tax Act with a view to making it productive, simple and supportive of the government’s Big Four Agenda.

The proposed law is also meant to spur the growth of the economy, embrace best practices and align with the Big Four Agenda.

A key highlight of the bill and how it will affect the cooperative societies is that it provides for taxation of co-operative societies, including those involved in savings and credit.

The existing Act provides for taxation of designated co-operatives, primary co-operatives and primary societies, which are registered and engage in the business of credit and savings cooperative society.

INTEREST INCOME

Co-operative societies, other than a credit and saving societies, will be subject to a corporation tax on total income of the year, deducting it from dividends and bonuses issued to members.

For a credit and saving co-operative society registered under the Co-operative Act, the income chargeable to tax will be the aggregate of all income, except interest from members. This implies that interest income from members will not be subject to corporate tax. This is in accordance with the existing Act.

Interest income from other sources other than members’ interest will be subject to corporate tax.

This is a radical shift from the existing Act under which only half of interest income from non- members is subject to corporate tax.

10 PER CENT

Any other income generated by the sacco, including that which is generated from members trading with the sacco, will be subject to corporate tax.

Co-operatives will also be affected by the Bill in the following ways:

i) Dividend income paid by a cooperative society to members, shall be subject to withholding tax of 10 per cent. The withholding tax is final tax.

ii) Capital gains tax has been proposed to increase from five to 20 per cent.

What are the implications for the cooperative movement?

BUY LAND

First, the corporation tax liability for credit and saving cooperative societies is set to increase significantly, since interest earned from other sources other than member savings will be subject to tax. This will reduce the overall capacity of the societies to lend to members as well as their ability to pay competitive dividends.

Secondly, for cooperatives that are in real estate business, the cost of doing business will significantly increase due to the proposed increase in Capital Gains Tax. This will particularly affect those cooperatives that buy land for subdivision and sale to members.

Finally, it is noteworthy that the principle of mutuality, which has ensured that mutual concerns are not taxed on dealings with members, will no longer hold. Any income other than interest income from members earned by a cooperative from members will be subject to income tax.

COMMITTEE STAGE

So, what is the way forward?

The National Treasury has invited the public to comment on the proposed Income Tax Bill by May 24. It is expected that the bill will be taken to the National Assembly for second and third reading. There is also an opportunity for the public to give their views at the committee stage when the bill is tabled in the National Assembly.

Cooperatives, Credit and Savings cooperatives or members, who wish to have the bill amended before it becomes law can reach out to the National Treasury or Members of the National Assembly.

Mr Riitho is a senior manager at EY. The views expressed here are not necessarily those of EY.