Banks under fresh KRA scrutiny over declared profits

The Kenya Revenue Authority (KRA) will reassess profits declared by banks for a fresh tax computation.

Banks have used the rise in bad debts, which are loans that have not been serviced for over 90 days, to declare lower than expected profits and subsequently, taxes.

KRA said the effect of bad debts arising from poor lending practices including insider loans will specifically not be applied in determining the applicable income taxes.

“For this reason, banks shall not be permitted to enjoy tax deductions for loans arising from irregular insider lending for which inadequate collateral was secured,” said KRA Commissioner General John Njiraini. As a result, several commercial banks have been notified that their corporate taxes will be computed afresh to set aside the impact of specific loans on their declared profits.

“Demands have already been issued in respect of non-qualifying deductions and more work is in progress,” Mr Njiraini added. The decision was taken after tax collections received from banks dipped 8 per cent to Sh11.4 billion in April, compared to Sh12.3 billion remitted in April of last year.

Banks, KRA reports, account for about 40 per cent of all tax collections for April, which is days after the March 31 deadline for filing their audited financial year results. Several lenders have reported depressed earnings after stricter guidelines were issued by the Central Bank of Kenya.

National Bank of Kenya, for instance, reported a full year net loss of Sh1.2 billion on account of swelling bad debts, to overturn a Sh2.4 billion profit announced for the nine months to September.

A similar fate befell Chase Bank where directors and associated companies were discovered to have been irregularly granted loans estimated at Sh16.6 billion, half of that amount to a single director. KRA explained that lending practices that were inconsistent with the CBK’s Prudential Guidelines, as was the case with the two lenders, would not qualify for tax purposes.

Overall, April was the best month for the revenue agency on record. KRA collected more than Sh132 billion in April alone, a tenth more than the comparable month last year. Among the reasons given for the record tax collections is the enhanced use of electronic services in revenue collection.

“The pick-up in second half (January 1 to June 30) performance is driven largely by improvements in PAYE and other Income Taxes which grew by 15.8 per cent and 20.1 per cent,” KRA said in its performance update for the ten months of the current financial year.

Budget deficits

Total tax collections for the financial year soared by more than Sh105 billion to Sh975 billion. And by Monday evening, total collections had crossed the Sh1 trillion-mark. In the previous financial year, KRA was able to collect just over Sh1 trillion in an unprecedented performance, which was however below the target set by the National Treasury.

Competing national needs, including a soaring public wage bill and development budgets have mounted pressure on the available public resources, with the State running budget deficits in every subsequent year.