In Kenya, the banking sector is increasingly taking a central role in the economy, with a new study showing the sector contributed Kes181.27 billion largely on account of higher excise tax in 2022.

The significance of this contribution was magnified in the Total Tax Contribution (TTC) study that shows the financial impact the banks had made in 2022.

Led by Alice Muriithi, a Partner at PwC Kenya and the lead technical advisor on the study, the TTC study reported a Total Tax Contribution of Kes181.27 billion in 2022. This was a 39.94 percent increase from the previous year's Kes129.52 billion.

The contribution marks a milestone for the banking sector, accounting for 8.93 percent of the total tax collections in Kenya, up from 6.8 percent in 2021.

The survey shows that financial activities accounted for over 5 percent of the country's nominal GDP in 2022. The government's reliance on this highly formalized and regulated sector for both economic growth and tax revenue was also evident.

Equitable tax contributions

As the spotlight shone on the tax policy framework of the sector, there emerged a realization that the sector's growth and sustainability were interlinked with a well-designed tax system.

Alice Muriithi highlighted the importance of creating a framework that would support sustainable growth while ensuring equitable tax contributions.

One of the key factors behind the substantial increase in the Total Tax Rate to 43.09 percent was the significant rise in corporate taxes borne by the banks. This marked a crucial step in aligning the banking sector's growth with its tax responsibilities.

Among the taxes analyzed in the report, the most notable increase was seen in excise duty, which had nearly tripled over the past three years. The growth was attributed to a broader scope for excise duty under the Finance Act 2021, coupled with a surge in non-funded income, such as fees and commissions, which attracted excise duty.

The study emphasized that this growth in excise duty was a result of various factors, including an increase in non-funded income due to the growth of digital transactions and the implementation of excise duty on fees and commissions on loans since July 2021.

Another significant finding was the 5.99 percent increase in input VAT expensed by the banks (irrecoverable VAT) compared to the previous year.

This rise was attributed to an increase in commercial rent expenses due to the opening of new physical branches by the banking sector. The incompatibility of  VAT exemptions with the bulk of the banks' income resulted in a higher irrecoverable VAT.

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Global Reporting Initiative

The TTC study not only brought to light the banking sector's tax contributions but also underscored the rising importance of tax reporting and transparency in the realm of sustainability.

Notably, the Global Reporting Initiative (GRI) and Principles of Responsible Banking provided a framework for public tax reporting, paving the way for individual banks to embark on a public tax transparency journey.

As the study findings reverberated through the financial community and the broader public, the spotlight remained firmly fixed on the banking sector's continued commitment to fueling Kenya's economic growth while shouldering its tax responsibilities.

Kenya Bankers Association’s Chief Executive Officer, Dr. Habil Olaka says the banking industry remains committed to sustain efforts towards anchoring business growth despite geopolitical challenges and various adverse effects both in the global and domestic macroeconomic environment.

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