Kenyan banks contributed more than a third of the total Sh274.36 billion corporate tax that the government earned from all sectors in 2022, highlighting the significance of financial institutions in the economy and to the exchequer.

A report by Kenya Bankers Association (KBA) shows that banks’ corporate tax reached Sh98.55 billion or 35.92 per cent of the total receipts from the entire economy.

The growth, sampled from 35 banks and four microfinance institutions (MFIs), is attributed to the profitability of the banking sector in 2022 which saw an increase in instalment taxes and balance of tax payment, the major forms of corporate tax.

This is the highest corporate tax by the banks since 2019 when it stood at Sh52.3 billion before the economy suffered the impact of the pandemic.

Business activities have since been improving, allowing banks to ride on increased deposits and loan demand thus boosting their working capital and profitability levels.

In 2022, nearly all tier-one banks such as Equity, KCB, Co-operative Bank, and Absa Bank recorded double-digit profit growth.

Corporation tax is one of the top tax heads for the country which improved by the biggest margin per Kenya Revenue Authority’s (KRA’s) collections in the financial year that ended in July 2022. “This contribution is more than a third of the total corporate taxes received by the government in 2022, an indication of the government’s continued over-reliance on the banking landscape for corporate tax payments,” KBA said in the sector report.

The 39 participants in the survey represent 97 per cent of the market share. KBA projects moderate growth in corporate tax this year linked to a slower rise in profitability and the general economy remaining largely the same

Double digits

Overall, the banking sector channelled a total of Sh181.3 billion in taxes in 2022, representing a 39.94 per cent rise compared to the previous 2021 year.

The amount also comprised of taxes borne and collected by banks from Withholding Tax and Excise duty, whose share of contribution all rose by double digits unlike Pay-As-You-Earn (PAYE) which grew by just 7.85 per cent between 2021 and 2022. The low contribution of PAYE occurred despite the banking sector absorbing more jobless Kenyans during the period partly leading to a rise in their operation costs. 

“This indicates that there is a broader base of taxpayers who pay PAYE and a smaller of base of taxpayers in the wider economy that pay Corporate Tax, Withholding Tax, and Excise Duty, indicating the government’s over reliance on the banking sector for these categories and the need to mobilise more taxpayers,” KBA noted.

With the Finance Act 2023 coming into force, it is expected that the PAYE contribution by banks could surge marginally given the sector’s composition of high-income earners.