Banks accounted for a quarter of corporation taxes paid in two years through December 2018, an industry analysis has shown, underlining Kenya’s heavy reliance on the banking industry for revenue.
An assessment by audit and consultancy firm PricewaterhouseCoopers (PwC) suggested that banks and micro-financiers contributed 26.19 percent, or Sh91 billion, of the estimated Sh347.4 billion corporate taxes in 2017 and 2018.
Banks are among the most profitable companies 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 companies.
In September, the Kenya Revenue Authority (KRA) said that only 33,426, or 8.3 percent, of the 401,306 companies registered for corporation tax paid up in the financial year through June 2019.
“Over the period 2017 and 2018, for every Sh4 of total corporation tax collected by KRA from all taxpayers, approximately Sh1 was paid by the banking sector,” PwC said in the report commissioned by the Kenya Bankers Association (KBA), the umbrella body for the industry.
“The industry’s high contribution to corporate taxes is also as a result that unlike other industries like manufacturing that enjoy a raft of tax incentives, there are hardly any corporate tax incentives for banks.”
Total corporate taxes paid by banks and micro-financiers, which are among the most regulated institutions, amounted to an estimated Sh39 billion in 2018.
This was a significant 25 percent drop compared with Sh52 billion the lenders paid in taxes based on their net earnings the year before, the report based on taxation data from 38 out of 44 banks and microfinanciers indicates.
PwC said the drop in corporate taxes in 2018 was largely because of a 4.79 percent dip in profitability in 2017 when the industry first felt the full impact of the September 2016 legal caps on interest charged on loans.
“The reduction in 2017 profits corresponds with the first full year of the interest rate cap coupled with a prolonged electioneering period. The result was large corporate tax over-payments in 2017 were utilised against 2018 corporate tax due leading to a decline in corporate taxes paid in 2018,” the report says.
Overall, the industry contributed Sh207.2 billion in corporate, employment and other taxes accruing from day-to-day operations such as excise duty on transaction fees in the two years under the review. This comprises Sh108.1 billion in 2017 and Sh99 billion last year, the report says.
KRA statistics show that the financial and insurance sectors overtook manufacturing to become largest source of tax revenue with receipts of nearly Sh165.84 billion in the year ended June 2019. Payroll taxes by the 38 lenders in the survey, which makes up 95.1 percent of the market share, increased to Sh19.2 billion last year from Sh18.7 billion in 2017 despite staff numbers falling by 706 to 28,352.
“The trend (in payroll taxes) is due to increase in wages paid to higher cadre employees in the sector and continued replacement of lower cadre jobs within banks as the sector increasingly adopts technology,” the report states.
Other taxes paid the industry in the two years include Sh35.5 billion in withholding taxes, excise duty (Sh14.2 billion) and irrecoverable Value Added Tax on investments such as technology, property taxes, among others.