The proposals seek a harmonized taxing mechanism that mirrors the social well-being of SACCO membership; standardization of taxes imposed by the government in the Income Tax Act (ITA) to reduce operational costs and weed out complexities; and an expanded definition of the term ‘primary society’ to promote equality among SACCOs in the taxation systems.
The Kenya Union of Savings and Credit Cooperatives (KUSCCO) has called for key amendments to the Finance Bill 2025/26 to help make the cooperative movement in the country more sustainable and increase its economic significance. The Union body presented the proposals to the National Assembly via the Departmental Committee on Finance and National Planning in a document also circulated to the media. The document presented four issues revolving around taxation, which KUSCCO believes must be addressed by Parliament to give the cooperative movement a better and fair business environment.
1.Differing Rates of Withholding Tax on Dividends and Interest Paid by SACCOs to Their Members on Their Savings.
According to KUSCCO, the different tax rates on dividends and interest paid to members are a significant concern in several ways, and therefore not healthy for both the members and the institutions themselves in terms of economic development. The current provisions prescribe a different tax rate for withholding tax on qualifying dividends at 5 percent and a different tax for qualifying interest at 15 percent of the gross amount payable. This difference effectively leads to administrative complexity for both SACCOs and the government, member confusion, system integration issues, and equity concerns. To effectively eliminate this situation, KUSCCO proposes that the tax rates for interest and dividends paid by SACCOs to members be harmonized to 5 percent, respectively. This proposal seeks to amend Paragraph 5 (e) and h(iii) of the Third Schedule to the Income Tax Act, which specifies the current tax rate on dividends and interest paid by SACCOs to members.
Citing the unique business structure of SACCOs, KUSCCO argued that the proposed amendments will bring more benefits to the SACCO business. A uniform tax rate for rebates and dividends reduces the complexity of tax administration for SACCOs. This simplification can lead to lower administrative costs and fewer errors in tax calculations and remittance. With a single tax rate for similar payments, SACCOs can more easily ensure compliance with tax regulations. KUSCCO stated that while this increases compliance, it reduces the risk of penalties and interest charges due to incorrect withholding or remittance of taxes. Members will also have a clearer understanding of the tax implications of their investments. This transparency can enhance trust and satisfaction among SACCO members, as they will no longer be confused by different tax rates for interest and dividends.
Furthermore, a consistent tax rate can make it easier for members to predict their net returns, potentially encouraging more investment in SACCOs. This can lead to increased capital for the SACCOs to support their activities and growth, providing a better economic outlook for the country.
- Increasing the Tax Exempt Threshold and Widening the Individual Income Tax Bands.
KUSCCO has proposed an amendment to Paragraph 1 of Head B of the Third Schedule to the Income Tax Act (ITA) to widen the individual income tax bands or the income brackets where taxation is applied and harmonize the individual income tax rate with the corporation tax rate. Citing the current economic hardships exacerbated by rising costs of basic commodities, including foodstuffs and non-alcoholic beverages, KUSCCO states that the current 10% tax deducted from employees earning a minimum monthly salary of Kshs 24,000, and 25% for those who earn a salary of Kshs 32,333, along with additional statutory deductions and levies, places maximum economic pressure on these individuals.
For instance, an individual earning Kshs 30,000 per month would incur Kshs 641 in income taxes and additional statutory contributions and levies amounting to Kshs 3,435, leaving them with a disposable income of only Kshs 25,924 per month. At this income level, the individual would struggle to afford basic necessities and support a family, including covering rent, school fees, utility bills, and transportation costs, especially given the rising cost of living, KUSCCO stated.
To protect low-income earners, KUSCCO has proposed an amendment to expand the tax bands. KUSCCO suggests raising the threshold for the 30% tax rate to a monthly salary of Kshs 500,000 from the current Kshs 32,333 per month. It also seeks an amendment to the tax-exempt threshold to be moved from the current Kshs 40,000 per month to Kshs 50,000 or (KES 480,000 — KES 600,000 per annum).
” Widening the tax bands will make the current tax bands more progressive to cushion low-income earners in the wake of rising costs of living and inflation rates. Notably, disposable incomes have reduced due to the introduction of the Affordable Housing Levy (AHL) under the Affordable Housing Act, 2024, Social Health Insurance Fund (SHIF) contributions starting October 2024, and the expected increase in statutory contributions to the National Social Security Fund (NSSF) from February 2025, which will further impact the net take-home pay of employees,” KUSCCO stated in its amendment proposals.
The suggested income tax bands aim to provide greater relief to low-income earners, aligning with Kenya Kwanza’s bottom-up economic transformation agenda that seeks to promote inclusive growth. Additionally, the union body stated that the proposed removal of the personal relief of Kshs 2,400 per month for resident individuals, as outlined in the government’s Medium Term Revenue Strategy (MTRS) for the years 2025 to 2027, underscores the need to revisit the current tax bands. This revision would help ensure that such a change does not further reduce the disposable income of low-income earners.
KUSCCO has provided concrete justifications for these amendments: firstly, it will address the challenge caused by the Finance Act (2023), which puts sole proprietors at a disadvantage. Currently, a sole proprietor earning income in excess of Kshs 800,000 is taxable at the rate of 35%, while a company earning the same amount of income is subject to tax at 30%. The proposals seek to harmonize the Personal Income Tax (PIT) with the Corporate Income Tax (CIT) rates to align both with the government’s objectives under the Medium Term Revenue Strategies for the year 2025–2027.
Secondly, the amendments will lead to increased economic growth driven by an increase in disposable income. The expansion of the individual income tax bands and the leveling of the individual income tax rate with the corporate income tax rate will have a profound impact on economic growth. The KUSCCO tax amendment proposals to the proposed Finance Bill 2025 envision that through broadened tax bands, individuals will have more disposable income, which they are likely to spend on goods and services, thereby increasing demand in the economy. This increased demand can lead to higher production levels, more job opportunities, and overall economic expansion. Individuals may choose to invest in various financial instruments, real estate, or small businesses, further fueling economic growth.
” These investments can lead to the creation of new businesses, innovation, and infrastructure development, all of which contribute to a robust and dynamic economy. Overall, these changes can create a positive cycle of increased spending and investment, driving sustained economic growth,” KUSCCO wrote in the document.
In a similar tone, KUSCCO proposed adjusting the individual income tax bands to reflect the rising cost of living, which is limiting the disposable income available to employees.
“Our proposed individual income tax rates will achieve progressivity in the tax structure in light of the current inflation rates and rising cost of living. This will ensure that even low-income earners can afford basic living commodities,” it said.
The ripple effect of this proposed change will stimulate economic growth in various sectors such as tourism, education, hospitality, and entertainment due to increased spending on non-essential goods and services. If the amendments are adopted, the government will realize increased revenues from corporate income taxes and consumption taxes such as VAT and excise duty, the SACCO top union body believes.
In addition to the proposed amendments, KUSCCO outlined some strategies that the government can employ to help the informal sector become more aware of tax matters and boost its tax collection capacity. These strategies are:
- i) Creating public awareness of the tax legislation and making it available in Swahili.
- ii) Leveraging and enhancing investment in appropriate, administratively efficient technology; and
iii) Implementing a simplified tax regime for small business traders and the informal sector.
- Harmonization of the Personal Income Tax (PIT) with the Corporate Income Tax (CIT)
In the proposed tax amendment draft, KUSCCO is seeking to bring about fairness between sole proprietorships, primarily the MSMEs, and companies or large corporations in the taxation system via a harmonized Personal Income Tax (PIT) and Corporate Income Tax (CIT).
For this, KUSCCO proposed the amendment of Paragraph 1 of Head B of the Third Schedule. ” We suggest that the personal income tax rate be harmonized with the corporate income tax rate, in line with the government’s objectives under the draft Medium-Term Revenue Strategy (MTRS). A single tax rate can promote fairness by ensuring that all income, whether earned by individuals or corporations, is taxed at the same rate. This can help reduce perceived inequities in the tax system”. It also added that having a unified rate reduces the opportunities for individuals and businesses to shift income between different tax categories to minimize their tax liability. Additionally, it can reduce the incentives for tax avoidance strategies.
- Definition of a Primary Designated Society
There has long been ambiguity surrounding cooperative societies that have both individual persons and groups of individual persons in their membership, leading to confusion regarding the category of societies they should fall under. The Cooperatives Act categorizes cooperative societies into four types:
- i) primary cooperative societies, formed by individual members with common interests;
- ii) cooperative unions, formed by at least two primary societies to provide regional support;
iii) national cooperative organizations (NACOs), which represent cooperatives at the national level; and
- iv) apex cooperative societies, which are national umbrella organizations for all cooperatives.
However, the above categories do not sufficiently provide a clear definition that suits cooperative societies with both individual persons and groups of individual persons, in which they can fit in.
Through the amendments, KUSCCO seeks the expansion of the term “designated primary societies” in Section 19A of the Income Tax Act (ITA) to include groups of individual persons. It also aims to expand the definition of “primary society” under Section 19A (7) by inserting the following words after “individual persons”: “and groups of individual persons.”
SACCO membership may include individual persons or groups of individual persons. Such groups are societies and typically do not include companies. However, the current definition of primary societies under Section 19A of the Income Tax Act (ITA) is restricted to individual persons. KUSCCO’s amendment proposals seek to harmonize the tax treatment of SACCOs whose membership includes both groups of individual persons and individual persons.
Particularly, it seeks to harmonize the tax treatment of cooperative societies that are SACCOs to ensure fairness and equity by eliminating preferential treatment based on their membership. Additionally, the amendment aims to ensure that the tax provisions do not disincentivize the formation and operation of cooperative societies that operate as SACCOs.
To address the confusing elements, KUSCCO proposed a review of the Income Tax Act to ensure a more equitable tax treatment for all types of cooperatives, recognizing their shared goals and contributions to the economy and community. KUSCCO outlined the aims of the Act review as follows:
- i) Align the tax treatment of SACCOs whose membership includes groups of individual persons to ensure fairness and equity.
- ii) Ensure that the tax provisions do not disincentivize the formation and operation of any type of cooperative society, including SACCOs whose membership includes both groups of individual persons and individual persons.
