The given assignment in question tends to give a brief but vivid explanation of how co-

operatives in Kenya (Saccos) are taxed using the given tax system in Kenya. As per the
given defination by Attiya Waris,that taxation is a process by which a state cannot run a
democracy well without it & taxation system cannot be run well without democracy as
Oliver Wendell Holmes has said on one occasion,taxes are what we pay for a civilized
society as depicted in the leading case of Compania de Tobaccos vs Collector (1904).
Through the given defination of taxation through the tax law system the term co-
operatives is achieved as economic organisations whose income generating activities are
devoted to the economic and social welfare of their members by providing services which
enable individuals to improve their personal skills and economic means for self
advancement. The values of co-operatives are based on:
1. Self help.
2. Self responsibility.
3. Democracy.
4. Equality.
5. Equity.
6. Solidarity.

Cooperative development in Africa in general with reference to Kenya has generally traversed
into two main eras: the era of state control and that of liberalization. The first era saw the origin
and substantial growth of cooperatives on the continent under state direction. Originating from
government policy and directives rather than people’s common interests and own motivation,
these organizations were conditioned to emerge as dependent agents and/or clients of the state
and other semi-public agencies in many countries, particularly the Anglophone ones like Kenya.
By serving as instruments for implementing government socio-economic policies, cooperatives
in many countries more or less served the interests of the state than the ordinary members and
the general public. These institutions were subsequently engulfed into state politics to the extent
that the failures of state policies found expression in the cooperative movement. This partly
explains why reports on the failure of cooperatives, just like the state, to meet their
developmental expectations during this era abound in the literature. But after 1997, state control
over the co-operative movement was ended thus introduction of liberization measures with a
view to create commercially autonomous member-based co-operatives that would be
democratically and professionally managed;self-controlled; and self-reliant. Very little is,
however, known about the impact of liberalization on the development of co-operatives of the
country, but the same cannot be said about well adapted co-operatives which are subsequently
recording better perfomance than they did in the era of self controlled.

Co-operatives in Kenya are broadly classified into two main categories namely, agricultural and
non-agricultural. Agricultural co-operatives are mainly involved in the marketing of produce, an
activity that has seen some of them get into the manufacturing sector through primary processing
of produce before they are marketed. These cooperatives are further organized along the crop or
produce that they handle; the key ones being coffee, cotton, pyrethrum, sugarcane and dairy. In
addition to these, there is also fishery, farm purchase and multi-produce co-operatives in the
agricultural sector.Whereas fishery co-operatives play the role of marketing members’ fish, farm
purchase.
Co-operatives mobilize resources to purchase land for the members. In the non-agricultural
domain, co-operative activities are found in the financial, housing insurance, consumer, crafts
and transport sectors. In the financial sector, savings and credit are the predominant activities of
co-operatives while co-operatives in the housing sector have the provision of affordable shelter
as their key activity. Consumer and craft co-operatives market respective commodities for a
profit while co-operatives in the transport sector engage in savings and credit activities. It is
important to note here that co-operatives are also spreading into the informal sector. After the
1997 liberalization, taxation system was embodied by the Income Tax Act of 2004 through
section 19A in January 1985 as follows:-

19A. (1) this section shall apply to designated cooperative societies other than
(a) a society which has been exempted from all the provisions of the Cooperatives Societies Act
under section 86 of that Act; or

(b) a society in respect of which the Commissioner is of opinion, having regard to the number of
members composing it, the nature of its business, the manner in which its business is conducted,
the extent of its transactions with non members
Or any other relevant factors, is a body corporate carrying on business for its own profit.

(2) In the case of every designated cooperative society, other than a designated primary society,
the income on which tax shall be charged shall be its total income for the year of income
deducting therefrom an amount equal to the aggregate of bonuses and dividends declared for that
year and distributed by it to its members in money or an order to pay money; but the deduction
shall in no case exceed the total income of the society for that year of income.

(3) In the case of every designated primary society, other than a designated primary society
which is registered and carries on the businessas a credit and savings cooperative society to
which the provisions of subsection.

(4) apply, the income on which tax shall be charged shall be its total income for the year of
income deducting therefrom an amount equal to the aggregate of bonuses and dividends declared
for that year and distributed by it to its members in money or an order to pay money.
In the case of a designated primary society which is registered and carries on business as a credit
and savings cooperative society its total income for any year of income shall, notwithstanding
any other provisions of this Act, be deemed to be the aggregate of –

(a) fifty per centum of its gross income from interest (other than interest from its members);

(b) Its gross income from any right granted for the use or occupation of any property, not
being a royalty, ascertained in accordance with provisions of this Act

(c) Gains chargeable to tax under section 3(2)(f);

(d) Any other income (excluding royalties) chargeable to tax under this Act not falling within
subparagraphs (a), (b) or(c) ascertained in accordance with the provisions of this Act.
(5) Any loss incurred in respect of any year of income prior to the year of income 1985 shall not
be deductible.

(6) Where the written down value of any asset or class of assets cannot be readily ascertained,
the Commissioner may, for the purpose of granting any wear and tear allowance in respect of the
year of income 1985, determine the amount of the written down value of any assets or class of
assets.

(7) In this section "bonus" and "dividend" shall, for the purposes of subsections
(2) And (3) have the same meaning as in the Cooperative Societies Act;"designated cooperative
society" means a cooperative societyregistered under the Cooperative
Societies Act; "primary society" means a cooperative society registered under the Cooperatives
Societies Act the membership of which is restricted to individual persons.
As we all know that income tax is the kind of public revenue whereby tax is imposed on the
incomes of individuals,hence the income of various individuals is usually taxed under (Saccos)
by the state in general.
Section 19A (2) it vividly states the instance in which tax shall be charged upon a co-operative
society shall be when the total income deducting from an amount equal to the given sum of
bonuses and dividends for that year and distributed to its members in money or an order to pay
money but the given conclusion shall in no case given exceed the total income of the given
Sacco for that year of income hence the given act through this sub section states how and when
income tax should be deducted from given Saccos nationwide in respect to their incomes. The
technical approach to the term designated co-operative societies can be described as:-

1. DESIGNATED PRIMARY CO-OPERATIVE SOCIETIES.

They include the co-operative societies whose members are basically individuals. Most of them
include farmers’ co-operative societies. They are vividly shown in subsection (3) of the above
section 19A. It shows that if a primary co-operative society pays all the adjusted incomes as
bonuses and dividends, then it shall not pay any tax liability. However, any income that remains
after distribution of bonuses and dividends shall be taxed at 30% corporate tax rate.

2. DESIGNATED SECONDARY CO-OPERATIVE SOCIETIES

They are co-operative societies whose members are not individuals but the designated primary
co-operative societies, who act as umbrella bodies of the given primary co-operative societies.
For tax issues it is vividly expressed through section 19A (2), which shows that secondary
societies can only pay bonuses and dividends from the current year of income profits but not
from any profits retained in the past years, and should the co-operative society pay all adjusted
income as bonuses and dividends, then no tax liability shall rise otherwise the adjusted taxable
income shall be subjected to 30%corporate tax rate.

3. SAVINGS AND CREDIT CO-OPERATIVES UNIONS( SACCOs)

They include primary societies since its members are individuals but they carry on the business
of savings and credit where the savings are for members or the credit is granted to the same
members. It is stated in section 19A (4). When a SACCO makes a loss in any year of income that
loss cannot be carried forward to be offset against the future profits of the society.
The total income of a Sacco shall be subject to 30% corporate tax rate when determining tax.
Also no expense shall be deducted in determining the gross rent income bit it shall be granted a
wear and tear allowance just like an ordinary business. It is also deemed that a bonus paid by a
co-operative society to its members is deemed a dividend payment subject to withholding tax
rate of 15% which is not considered as final tax.
Apart from the income tax system that Saccos undergo in Kenya, they also undergo another type
of tax which is legal and existant in our given state. Co-operatives in Kenya also go through the
Customs and Excise tax system in general.
Through proven research and enactments of various new bills and laws there is urging and the
general need to protect co-operatives and also nuture hence to avoid this double system of
taxation. Recently in parliament issues of excise duty tax were raised by members of parliament
led by their chairman from Ainamoi constituency Benjamin Langat in respect to the co-operative
movement.
The various issues discussed during the meeting included functions of co-operatives which
were;-

(a) To build wealth and long term assets and improve the members lives through self help.

(b) Provide access to loans, savings and other financial services at fair rates.

It was also noted during the discussion that due to the significant imput of income in the
economy through co-operatives makes it a key sector towards vision 2030,since it controls about
43% of Kenya’s gross domestic product(GDP). Saccos in Kenya employs more than 300,000
people besides providing opportunities for self employment to many more hence mobilising
savings of more than 230 billion.Goldman Sachs Global Investment Company also stated that
women with access to formal savings accounts increase business investments by 40% in (4-6)
months which is precisely the kind of intervention that Kenya and Africa requires if meaningfull
development and growth are to be achieved.
This was also seconded by Dr.William Songa Permanent Secretary in the Ministry of
Industrialization and Enterprise Development by stating that Saccos in Kenya play a key role in
creating vibrancy and competitiveness in the financial sector that most savers with modest
incomes are mostly women. Despite the encouraging statistics, the members of parliament led by
Honarable Langat enabled Cabinet secretary Henry Rotich to second ammendments to the
Customs and Excise Act through the Finance Bill 2013 to include excise tax on money
transactions carried out by Saccos in an effort to finance the growing government expenditure.
Current research over the world shows that taxing Saccos is not conclusive to saving
mobilization and financial inclusion, as through this instance it tends to take valuable resources
from modest income earners savings and puts this into government beaucracy, which is counter-
productive.
The 10% Excise duty in general will tend to harm Saccos in Kenya, as their efforts to increase
saving and financial of Kenya’s poor income earners will be futile hence it will lead to reduced
services,increased fees or worse rates on loans and savings and even if the incidence of the tax
technically falls on the co-operatives. Behavioural economics has eventually proved that excise
taxes on services such as co-operatives only reduce use of the service and the availability
especially with respect to the poor income earners because they are least able to afford the taxes
increased costs, hence it will discourage co-operatives whose poor members are engaging in
services such as:-

(a) Salary processing.

(b) Loan processing.
(c) Dividend and deposit processing.
(d) Produce payment processing.
(e) Acoount maintenance.

Due to such inability to provide such services, it will lead to reduced economic activity by poor
kenyans of modest incomes and it will harm financial inclusion efforts in many ways beyond
simply imposing a 10% surchage that tends to discouragethe poor from using Saccos services.
Generally the costs of financial services for poor Kenyans will increase more than 10%; excise
duty because co-operatives will consolidate due to the losses created by the tax, as loans tend to
become more expensive.
In a given example of the United Kingdom credit loans union, do not pay corporate income tax
on interest income from loans made from members even though the British Law does impose
taxes on credit unions investment income. Using the current Kenyan situation we realise that yhe
given 10% excise duty initiated by the given ammendments in the Financial Bill of 2013, and the
30% corporate tax that the Kenyan government issues is in effect indulging members on the
same the co-operative societies of Kenya into the double taxing system as it ends up taxing the
co-operative itself and their members on the same business activities, hence making it the most
taxed credit co-operative organization in the world.
Through the above thourough research about the taxation of co-operatives mostly in our
jurisdiction,it is wise to conclude that the double taxation system affecting the co-operative
society in Kenya tends to cause more damage than good with referenceto our economy in
question hence adverse implications to it in the long run.