•This translates to 26 per cent of the corporate taxes collected by KRA, tagging the banking sector as the largest taxpayers.
•The sector has also raised concerns over lack of incentives attributing to the high huge sums of imposed tax unlike other industries such as automotive and manufacturing which enjoy flat rates to encourage investments.
Banks and micro-finance institutions paid Kenya Revenue Authority Sh 207.2 billion in 2017 and 2018, indicating high compliance, according to study by PricewaterhouseCoopers (PwC).
This constituted of corporate tax and irrecoverable VAT by the institutions and taxes collected on behalf of the government such as PAYE and withholding tax.
The report by the audit, consultancy and tax services firm shows that direct costs incurred by the institutions as tax dropped from Sh62 billion in 2017 to Sh48.4 billion in 2018.
This was attributed to reduction in corporate tax paid from Sh52 billion down to Sh39 billion .
“The reduction in 2017 profits corresponds with the full year of interest rate cap coupled with a prolonged electioneering period,” PwC tax services director Titus Mukora said.
Tax collected on behalf of the government rose from Sh46.1 billion to 50.7 billion in 2018 representing a 10 per cent growth.
Over the period, the excise duty collected by banks grew to Sh8.3 billion from Sh5.9 billion while total excise collected in the financial sector services increased to Sh18.8 billion from Sh13.7 billion, representing a 42 per cent growth in both segments.
Finance Act 2018 provisioned for a two per cent rise in fees and commissions charged by the banking industry.
In addition, the excise duty rate for non-funded income increased from 10 per cent to 20 per cent.
According to the report, total corporate tax paid in the country was Sh247.4 billion, out of which Sh91 billion was from the banking industry.
As a result, for every Sh4 of corporate tax paid in Kenya, about Sh 1 was paid by the banking sector.
This translates to 26 per cent of the corporate taxes collected by KRA, tagging the banking sector as the largest taxpayers.
According to KBA chief executive Habil Olaka, the high contribution was high levels of compliance.
“Banks operate in a highly regulated environment and this has led to very high levels of transparency,” Olaka said.
The sector has also raised concerns over lack of incentives attributing to the high huge sums of imposed tax unlike other industries such as automotive and manufacturing which enjoy flat rates to encourage investments.
“On the contrary, one of the industry's core expenses, bad debt expenses, has very strict requirements for deductibility which leads to the high corporate taxes paid by the sector,” the report added.
However, according to KRA Policy and Tax Advisory deputy commissioner Caxton Ngeywo this has been compensated by lack of tax charged on VAT output, on use of technology infrastructure.
The revelation on the economic contribution coincides with the Banking Industry Shared Value Report 2019 released in June, which showed tax revenue paid to the collection authority in 2016/17 and 2017/2018 financial years was amounted to Sh143 billion.
“This study has underscored our findings from KBA’s internal review. Our shared value report understated the industry’s tax contribution,” Olaka said.
“We ask the government to support the development of a tax policy specifically for the banking sector such as a comprehensive banking industry tax policy that would seek to address some of the sticky issues around taxation while taking a long-term view on the industry,” he added.
In 2018, the financial services sector’s contribution to GDP growth ranged from 0.1 per cent to 0.2 per cent.
The study was carried in 38 banking institutions and micro-finance representing 95.1 per cent of the market share in net assets.