REPORT

PAYE, corporate tax drop erodes banks' tax contribution

The two categories represent the two largest contributors of total tax contribution

In Summary
  • According to the report, there was a 12.7 per cent decrease in the overall tax contribution by the banking sector from 2019 to 2020.
  • The decline in tax contribution between during the period was substantially driven by declines in corporate tax borne and PAYE collected.
Habil Olaka, Kenya Revenue Authority Domestic Tax Commissioner Rispah Simiyu and PwC Kenya Tax Partner Titus Mukora during the report’s launch
Habil Olaka, Kenya Revenue Authority Domestic Tax Commissioner Rispah Simiyu and PwC Kenya Tax Partner Titus Mukora during the report’s launch
Image: HANDOUT

The slow economic environment brought about by the Covid-19 saw banks contribute less taxes to the economy, a new report shows.

Contributors to the lenders taxes collected less , doubled with declining profitability which lowers corporate tax.

The report by PricewaterhouseCoopers (PwC) on behalf of the Kenya Bankers Association notes there was a 12.7 per cent decrease in the overall tax contribution by the banking sector from 2019 to 2020.

The contribution dropped from Sh120.1billion in 2019 to Sh104.8billion.

“The decline in tax contribution between during the period was substantially driven by declines in corporate tax borne and PAYE collected,” the report notes.

The two categories represent the two largest contributors of total tax contribution by the sector standing at 42.5 per cent and 16.5 per cent respectively of the total tax contribution.

The measures put in place by the government to provide relief to taxpayers against adverse economic effects of Covid-19 were also partly attributed to the dip.

The Corporation Tax rate was reduced from 30 percent to 25 percent and Pay As You Earn (PAYE) rate from 30 percent to 25 percent.

Taxes borne are those which are a direct cost to a business.

As banks got reduced income due to loan payment holidays granted to customers, waived transactions charges, increased loan write offs and high provisions, the corporation taxes derived from this dropped. 

Due to the pandemic, Kenya experienced a depressed economic performance and quality of assets, with provisioning for loan losses increasing by 47.5 per cent to Sh198.1Billion from Sh134.3billion in 2019.

Loan loss accommodations absorbed 45.7 percent of non-performing loans compared to 40.2 percent in 2019, according to the State of the Banking Industry Report 2020.

PAYE on the other hand dropped from Sh18.9 billion in 2019 to Sh17.9 billion in 2020, attributed to a reduction in staff numbers in the sector in 2020.

According to the study participants, the number of employees they had dropped from 34,581 in December 2019 to 31,703 as of December 2020.

“The number of staff in banks has been declining as they shift to digital channels. This trend accelerated in 2020 as a result of the Covid-19 pandemic and the work from home further resulted in the release of non-essential staff,” the report notes.

Despite the drop in PAYE collected, the report notes that banking sector PAYE per capita(per person) is five times higher than the PAYE per capita in the country.

The study shows participants’ PAYE per capita was Sh545,000 in 2019 while the country's per capita was Sh114,000.

“The high PAYE per capita is indicative of the relatively higher wages of bank employees and high compliance levels demonstrated in the industry,” the report notes.

The study covered 32 banks representing 96 per cent of the industry by market share.

PwC Tax Partner Titus Mukora observed that the study offers an opportunity for the tax contribution of the banking sector to be quantified and analysed so that policy makers can assess whether the operating environment is supportive of the sector.

“As we continue to navigate the unprecedented business environment induced by Covid-19, the overarching challenge for the banking industry is to continue investing resources towards remaining at the frontier while underpinning economic recovery,” said Kenya Bankers Association Chief Executive Officer, Habil Olaka.