BY SILAS APOLLO
Close to 39 banks in the country made a total tax contribution (TTC) of Sh181.27 billion in 2022, a study by the Pricewaterhousecoopers shows
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.
The TTC study 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 PwC study says that his 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.
The study also revealed that the Total Tax Rate (TTR), which is a measure of the ratio of all taxes borne relative to profitability, was 43.09%. This means that for every Sh100 of profits, banks paid Sh43.09 to the government as taxes. The TTR for the year 2021 was 32.85%. At the same time, the high TTR in 2022 was pushed by the significant increase in corporate taxes.
The study further noted a 76.41% increase in excise duty collected by the banking sector. This is the only tax analysed in this report that has nearly tripled over the past three years.
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.
“Between 2021 and 2022, excise Duty experienced a remarkable growth rate of 60.13%. This can be attributed 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.
“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 1 July 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.
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.
“There is no doubt that the TCC (total tax contribution) also underlines the industry’s collective commitment to transparency and tax compliance. As an industry we are, therefore, happy that our members are at the forefront of tax transparency and compliance in the corporate sector,” KBA’s chief executive Dr. Habil Olaka, says.
Olaka adds that the financial services sector plays an important role in supporting economic growth. He says the banking industry remains committed to sustain efforts towards anchoring business growth despite geopolitical challenges and various adverse effects both in the global and domestic macroeconomic environment.
