PwC Kenya in partnership with the Kenya Bankers Association (KBA) has released the 2022 Total Tax Contribution (TTC) study of the Kenya Banking Sector, with the findings showing that the Total Tax Contribution made was Sh181.27 billion.
This is a 39.94 per cent increase from the Total Tax Contribution of Sh129.52 billion made in 2021.
The report revealed that the growth in Total Tax Contribution is primarily attributable to corporate tax due to an increase in the balance of tax (a type of corporate tax) paid in 2022 and an increase in 2022 instalment taxes.
Both of these grew due to year-on-year growth in the sector's profitability of 85 per cent and 22 per cent in 2021 and 2022 respectively.
39 banks that participated in this study (representing 97.65 per cent of the market share from a net asset perspective) contributed to these key findings.
PwC’s TTC methodology discloses both the taxes that a company bears, such as corporate tax and Value Added Tax that it is not able to recover, and also the taxes that banks collect as an agent of government such as Pay-As-You-Earn (PAYE) and Excise Duty.
The TTC methodology only accounts for taxes paid on a cash basis and does not take into account taxes accrued.
PwC Kenya’s Country Senior Partner and Regional Senior Partner, Eastern Africa Peter Ngahu said the Total Tax Contribution grew despite challenges.
"This was despite a challenging environment characterized by increased inflation, prolonged drought, and depreciation of the Kenyan shilling against major currencies. Other pressures included geopolitical tensions arising from the Russia-Ukraine conflict, and election-related uncertainties,” he said.
The report's key findings also revealed that the 2022 contribution is 8.93 per cent of the total tax collections in Kenya compared to 6.8 per cent in 2021.
Alice Muriithi, Partner at PwC Kenya and the lead technical advisor on the study, said, "this 8.93 per cent 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 per cent to Kenya’s nominal GDP in 2022. This underlines the government’s reliance on the highly formalised and regulated banking sector to not only spur economic growth but also pay its own taxes."
The study offers an opportunity for the Total Tax Contribution of the banking sector to be quantified and analyzed in order to facilitate data-driven discussions and engagements with policymakers and regulators.
Kenya Bankers Association’s Chief Executive Officer Habil Olaka notes that the financial services sector plays an important role in supporting economic growth.
He says the banking industry remains committed to sustaining efforts towards anchoring business growth despite challenges.
"This report continues to demonstrate high levels of transparency and compliance among banks, which highlights sound corporate governance. There is no doubt that the TTC also underlines the industry’s collective commitment to transparency and tax compliance," said Olaka.
The study also revealed that the Total Tax Rate, which is a measure of the ratio of all taxes borne relative to profitability was 43.09 per cent.
This means that for every Shs100 of profits, banks paid Sh43.09 to the government as taxes.
The study further noted a 76.41 per cent increase in Excise Duty collected by the banking sector.
This is the only tax analyzed 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 per cent. 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," said Muriithi.
"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."
Furthermore, the study revealed that Input VAT expensed by banks (irrecoverable VAT) increased by 5.99 per cent in 2022 compared to 2021.
An increase in commercial rent due to the opening of new physical branches by the bank sector in 2022 meant that commercial rent expenses incurred increased.
This led to higher irrecoverable VAT as commercial rent attracts VAT, but banks are not able to offset the VAT incurred as the bulk of their income is VAT exempt.