The banking sector contributed sh207.2 billion in taxes in 2017 and 2018, a report by PwC has revealed.
PwC Kenya in partnership with Kenya Bankers Association (KBA) made the revelations in the first of its kind in Kenya, outlining the tax contribution of the banking sector in forms of taxes borne by the banks. These are corporation tax and irrecoverable VAT, and taxes collected as an agent of government such as PAYE, excise duty and withholding tax.
It involved 38 banks and microfinance institutions which made a total tax contribution of sh108.1 billion and sh99 billion in 2017 and 2018 respectively.
Titus Mukora, Tax Partner at PwC Kenya, said the purpose of the study was to quantify the tax contributions and draw connections between taxes and economic developments such as the interest rate caps and the adoption of technology by banks.
“Our analysis uses the Total Tax Contribution framework, where tax contribution is segmented into taxes borne and taxes collected. Taxes borne are those which are direct costs to a business such as corporation tax and irrecoverable VAT. Taxes collected are those that a business collects from taxpayers on behalf of the government such as PAYE and withholding tax,” said Mr. Mukora.
There was a decline in tax contribution from 2017 to 2018 attributable to reduction in taxes borne by banks, and in particular a reduction of corporation tax paid. This was a result of low profits reported in 2017 relative to 2016.
The result was large corporate tax over-payments in 2017 were utilized against 2018 corporate tax due leading to a decline in corporate taxes paid in 2018.
The decline in taxes arising from declined profitability in 2017 is reflected in the reported year on year decline of the industry’s net income (of – 4.79 per cent) for the period 2016 to 2017. This is also reflected in the decline in growth of net assets in the sector in 2017 of 6.8 per cent down from an 11 per cent growth in the previous year.
The report shows that taxes collected grew by 10 per cent from 2017 to 2018 (sh46.1 billion to sh50.7 billion). This growth was largely due to a 40 per cent increase in excise duty which resulted from an increase in excisable fees and commissions charged by banks to customers as well as an increase in the excise duty rate charged by the sector from 10 per cent to 20 per cent within 2018.
The report further shows that, for every Ksh4 of corporation tax paid in Kenya, approximately sh1 was paid by the banking sector. This translates to 26 per cent of the corporate taxes collected by the Kenya Revenue Authority (KRA).
Kenya Bankers Association (KBA) CEO Dr. Habil Olaka while speaking during the launch said they were pleased that PwC has underscored their findings from KBA’s internal review. He said KBA’s shared value report has understated the industry’s tax contribution, and PwC has facilitated in providing an even clearer picture in terms of how banks lead in the area of tax compliance and contribution to the national budget.
In 2018, the financial services sector’s contribution to GDP growth ranged from 0.1 per cent to 0.2 per cent. Having in mind that the sector is not a significant driver of GDP growth, the high corporate tax contribution is also an indication of high levels of regulation and compliance in the industry.