A study conducted by the Pricewaterhousecoopers shows that close to 39 banks in the country made a total tax contribution of Sh181.27 billion in 2022
BY SILAS APOLLO
The study, done in partnership with the Kenya Bankers Association, shows that the new figures is a 39.94% increase from the total tax contribution of Sh129.52 billion made in 2021.
It further indicates that the 2022 contribution by the 39 banks, which cumulatively represents 97.65% of the market share from a net asset perspective, is 8.93% of the total tax collections in Kenya compared to 6.8% in 2021 – the 8.93% contribution of the banking sector to the total tax collections in Kenya underscores the significant contribution of the banking sector to Kenya’s tax revenues.
Financial activities (including banking) contributed more than 5% to Kenya’s nominal GDP in 2022, underlying the government’s reliance on the highly formalised and regulated banking sector to not only spur economic growth but also pay its own taxes.
“Given this context, it is crucial for the tax policy framework of the sector to be designed in a way that facilitates sustainable growth,” said Alice Muriithi, partner at PwC Kenya and the lead technical advisor on the study.
She added that between 2021 and 2022, excise duty experienced a remarkable growth rate of 60.13% thanks to an increase in non-funded income (including fees and commissions) and an increase in the volume and value of digital transactions given the continued investments in technology.
There was also a 76.41% increase in excise duty collected by the banking sector – this is the only tax analysed in the report that has nearly tripled over the past three years.
“The growth in excise duty is also attributed to the introduction of Excise Duty on fees and commissions on loans by the Finance Act, 2021 with effect from July 1, 2021 meaning that fees and commissions on loans were subject to Excise Duty for the entire 2022 financial year – compared to only half of the 2021 financial year,” said Muriithi.
The study revealed that the Total Tax Rate (TTR), which is a measure of the ratio of all taxes borne relative to profitability, was 43.09%, which means that for every Sh100 of profits, banks paid Sh43.09 to the government as taxes. While the TTR for the year 2021 was 32.85%, the high TTR in 2022 was driven by the significant increase in corporate taxes, mentioned above.
This is largely attributed to a wider scope for Excise Duty as per the Finance Act 2021 as well as a growth in non-funded income such as fees and commissions which are subject to Excise Duty.
Further, input VAT expensed by banks (irrecoverable VAT) increased by 5.99% in 2022 compared to 2021. Increase in commercial rent due to opening of new physical branches by the bank sector in 2022 meant that commercial rent expense incurred increased.
This led to higher irrecoverable VAT as commercial rent attracts VAT, but banks are not able offset the VAT incurred as the bulk of their income is VAT exempt.
Tax continues to increasingly be viewed as a key aspect of sustainability given the potential impact of taxes to achieve social economic cohesion and drive long term prosperity.
The Global Reporting Initiative (“GRI”) now has a standard for tax reporting known as GRI 207 which provides guidance on public tax reporting.
In addition, the Principles of Responsible Banking, Nairobi Securities Exchange ESG Disclosures Guidance Manual (for listed banks) also provides a framework for public tax reporting.
Given the significance of taxes paid by banks in Kenya, there is sufficient impetus for individual banks to embark on the public tax transparency journey.
