As nearly every sector shrunk under the weight of the Covid-19 scourge, commercial banks in Kenya were reporting double-digit growths in profitability, emerging from the health crisis with handsome dividends for their shareholders.
Besides owners, the taxman was the second biggest beneficiary of the supernormal profits, a new survey has shown.
The PricewaterhouseCoopers (PwC) report shows that banks accounted for over a quarter of corporate taxes paid to the taxman in the year to December 2021.
The report released on behalf of the Kenya Bankers Association (KBA) on Wednesday shows the corporate taxes paid to the Kenya Revenue Authority (KRA) jumped 22.82 percent to Sh50.7 billion compared to a year earlier when the sector’s corporation tax payment amounted to Sh41.28 billion.
The data shows that banks accounted for 25.57 percent (Sh50.7 billion) of the Sh198.24 billion total corporate tax paid in Kenya last year. Local companies are required to pay 30 percent of their profits as corporate taxes.
Banks are among the most profitable outfits in Kenya, making them among the biggest generators of tax revenue based on their net earnings in a country where there is a low level of tax compliance among corporates.
“The increase in 2021 compared to 2020 was largely driven by increase in profits with the profit before tax of the banks increasing by 85.17 percent in 2021 relative to 2020,” said the study.
“The profit before a tax increase is aligned to increased economic activity in 2021 as reflected by the GDP growth which grew from a contraction of 0.3 percent in 2020 to 7.5 percent in 2021.”
Growth in the economy in turn helped banks improve the quality of their loan books and interest earnings.
KRA defines the banking sector to include 44 listed lenders, 16 saccos, seven micro financiers, 38 custodian banks as well as bureaus and international financiers with local offices.
The study documented filings from 38 banks, which participated representing 97 percent of the market share.
Overall, the industry contributed Sh129.52 billion in corporate, employment and other taxes accruing from day-to-day operations such as excise duty on transaction fees in the year under the review.
The study focused on both the taxes that a company bears, such as corporate tax and Value Added Tax (VAT) that it is not able to recover (irrecoverable VAT) and also the taxes that banks collect as an agent of government such as Pay-As-You-Earn.
Jump in excise duty
The study says the increase in corporation tax can also be partly explained by the increase in the corporation tax rate from 25 percent in 2020 to 30 percent in 2021.
The study further shows a 58 percent jump in excise duty collected by the banking sector to ShSh14.67 billion. This was the most significant year-on-year growth noted in the study, largely attributed to the 2021 economic recovery that provided a broader volume and value of transactions subject to excise duty.
“The recovery in the economy in 2021 provided a broader volume and value in transactions subject to excise duty,” said the study.
Nine in 10 companies operating in Kenya did not pay taxes in the year to June, pointing to widespread avoidance that leaves a few firms to shoulder the burden of funding the government.
Data from KRA shows a modest 84,428 out of the 759,164 companies registered for corporation tax paid their dues for the year ended June 2022, reflecting a compliance rate of 11.12 percent.
This means that many companies could be reporting losses as a tax avoidance strategy, a gap that the State sought to plug by introducing a minimum tax on corporate sales.
It could also point to the rising number of dormant companies, mainly start-ups registered in recent years with the target of supplying the national government, county governments and State corporations with goods and services.
Kenya Revenue Authority data shows that 504,036 or 66.39 percent of registered firms filed returns by June, but only 16.75 percent of those paid corporation taxes, an indication they either suffered an operating loss or avoided duty payment.
The large share of firms filing ‘Nil’ income tax returns was behind the government’s unsuccessful push to impose a minimum one percent tax on corporate sales.
Resident companies, corporations and trusts pay 30 percent on their profits through quarterly instalments, while the rate for foreign firms with operations in Kenya is 37.5 percent.