Banks paid Sh42 out of every Sh100 profit to state in 2022 - report

Kenya's banking sector contributed close to nine per cent of  the country's total taxes in 2022 despite increased volatilities in the global financial market. 

The 2022 contribution is 8.93 per cent of the total tax revenues compared to 6.8 per cent in 2021.

The industry's Total Tax Contribution shows the 39 participating banks paid Sh181.27 billion of the total Sh2.03 trillion collected in the review period up from Sh129.5 billion in the previous year. 

The report released Wednesday by the Kenya Bankers Association (KBA) and PricewaterhouseCoopers (PwC) shows taxes borne were at Sh103.3 billion while total tax collected was Sh77.7 billion.

"The 39.9 per cent growth in TTC for the sector was higher than the growth in government revenue 0f 6.9 per cent, an indication that growth in taxes was more concentrated within the banking sector compared to other sectors,'' states the report. 

This was mainly driven by a 77.26 per cent increase in corporate tax from Sh49.5 billion in 2021 to Sh87.7 billion. This was due to growth in the sector's profitability in the reviewed period. 

Last year, the banking sector recorded a 22 per cent rise in net profits to Sh175.3 billion from Sh143.7 billion in 2021 with the industry nearly doubling its earnings in a decade from Sh88 billion in 2013.

Peter Ngahu, PwC Kenya’s Country senior partner says the report provides valuable insight into how the Total Tax Contribution of the banks grew by 39.94 per cent in 2022 relative to 2021.

"This was despite a challenging environment characterised 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,'' Ngahu said. 

KBA CEO Habil Olaka on the other hand said that the tax remitted by the industry underscores the significant contribution of the banking sector to Kenya’s economy.

"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,'' he said. 

He added that the industry remains committed to sustaining efforts towards anchoring business growth despite geopolitical challenges and various adverse effects both in the global and domestic macroeconomic environment.

Given this context, it is crucial for the tax policy framework of the sector to be designed in a way that facilitates sustainable growth,” commented Alice Muriithi, Partner at PwC Kenya and the lead technical advisor on the study.

The study reveals 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 Sh100 of profits, banks paid Sh43.09 to the government as taxes up from  Sh32.85 in 2021.

The study further notes a 76.41 per cent increase in Excise Duty collected by the banking sector during the year, having 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.

Further, input VAT expensed by banks increased by 5.99 per cent to Sh8.3 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.

Furthermore, lenders in the country contributed Sh26.6 billion in withholding tax, an increase of 15.5 per cent compared to 2021. This was driven by 8.7 per cent growth in bank deposits to Sh5 trillion compared to Sh4.6 trillion the previous year. 

The banking sector contributed Sh37.3 billion as Pay -As -You-Earn (PAYE), accounting for 7.85 per cent of the total taxes paid by all employees in the country. The sector paid Sh26.6 billion the year before. 

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.

The report concludes that 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.