The Kenyan banking sector has called on the government to consider a collaborative approach towards tax policies and their administration following the disputes caused by the Finance Act 2023.

During the launch of the Kenya Banking Sector Total Tax Contribution 2022 report on Wednesday, the sector emphasized the need for policy and regulatory frameworks to promote optimal banking services.

This even as the year 2022 proved challenging for the banking sector due to increased inflation, prolonged drought, election uncertainties, and depreciation of the Kenyan shilling which resulted in the GDP growth rate reduced to 4.8% from 7.6% in 2021.

The report revealed that 39 banks, representing 97.65% of the market share, made a total tax contribution of Ksh.181.27 billion in 2022, marking the highest in five years.

The growth in total tax contribution was primarily attributed to corporate tax, reflecting the sector's profitability growth in 2021 and 2022.

Despite geopolitical challenges and adverse macroeconomic effects, the banking industry remains committed to supporting economic growth.

The financial services sector, contributing more than 5% to Kenya's nominal GDP in 2022, underscores the significant role banks play in the country's tax revenues.

Notably, the total tax rate, measuring taxes borne relative to profitability, increased to 43.09% in 2022 from 32.85% in 2021, driven by a significant rise in corporate taxes.

Additionally, the study observed a 76.41% increase in Excise Duty collected by the banking sector, attributed to a wider scope for excise duty under the Finance Act 2021 and growth in non-funded income.

“Between 2021 and 2022, Excise Duty experienced a remarkable growth rate of 60.13%. This can be attributed to an increase in non-funded income (including fees and commissions) and an increase in the volume and value of digital transactions given the continued investments in technology,” said Alice Muriithi, partner, Tax and Transfer Pricing at PwC.

“The growth in Excise Duty is also attributed to the introduction of Excise Duty on fees and commissions on loans by the Finance Act, 2021 with effect from July 1, 2021 meaning that fees and commissions on loans were subject to Excise Duty for the entire 2022 financial year - compared to only half of the 2021 financial year.”

Moreover, input VAT expensed by banks increased by 5.99% in 2022, mainly due to the rise in commercial rent expenses from opening new physical branches.

Overall, the report sheds light on the banking sector's critical contribution to Kenya's tax revenues and its dedication to fostering economic growth amid prevailing challenges.