diff --git a/doc/source/whatsnew/v1.3.0.rst b/doc/source/whatsnew/v1.3.0.rst
index 5197fd2b23dab..ba3af0a6accb3 100644
--- a/doc/source/whatsnew/v1.3.0.rst
+++ b/doc/source/whatsnew/v1.3.0.rst
@@ -284,7 +284,7 @@ Plotting
 Groupby/resample/rolling
 ^^^^^^^^^^^^^^^^^^^^^^^^
 
--
+- Bug in :meth:`SeriesGroupBy.value_counts` where unobserved categories in a grouped categorical series were not tallied (:issue:`38672`)
 -
 
 Reshaping
diff --git a/pandas/core/groupby/generic.py b/pandas/core/groupby/generic.py
index 16b00735cf694..f2899a7ca704b 100644
--- a/pandas/core/groupby/generic.py
+++ b/pandas/core/groupby/generic.py
@@ -42,6 +42,7 @@
     ensure_int64,
     ensure_platform_int,
     is_bool,
+    is_categorical_dtype,
     is_integer_dtype,
     is_interval_dtype,
     is_numeric_dtype,
@@ -681,9 +682,10 @@ def value_counts(
         from pandas.core.reshape.merge import get_join_indexers
         from pandas.core.reshape.tile import cut
 
-        if bins is not None and not np.iterable(bins):
-            # scalar bins cannot be done at top level
-            # in a backward compatible way
+        ids, _, _ = self.grouper.group_info
+        val = self.obj._values
+
+        def apply_series_value_counts():
             return self.apply(
                 Series.value_counts,
                 normalize=normalize,
@@ -692,8 +694,14 @@ def value_counts(
                 bins=bins,
             )
 
-        ids, _, _ = self.grouper.group_info
-        val = self.obj._values
+        if bins is not None:
+            if not np.iterable(bins):
+                # scalar bins cannot be done at top level
+                # in a backward compatible way
+                return apply_series_value_counts()
+        elif is_categorical_dtype(val):
+            # GH38672
+            return apply_series_value_counts()
 
         # groupby removes null keys from groupings
         mask = ids != -1
diff --git a/pandas/tests/groupby/test_value_counts.py b/pandas/tests/groupby/test_value_counts.py
index c5d454baa7e7b..afb648d8527ca 100644
--- a/pandas/tests/groupby/test_value_counts.py
+++ b/pandas/tests/groupby/test_value_counts.py
@@ -9,7 +9,16 @@
 import numpy as np
 import pytest
 
-from pandas import DataFrame, Grouper, MultiIndex, Series, date_range, to_datetime
+from pandas import (
+    Categorical,
+    CategoricalIndex,
+    DataFrame,
+    Grouper,
+    MultiIndex,
+    Series,
+    date_range,
+    to_datetime,
+)
 import pandas._testing as tm
 
 
@@ -111,3 +120,30 @@ def test_series_groupby_value_counts_with_grouper():
     expected.index.names = result.index.names
 
     tm.assert_series_equal(result, expected)
+
+
+def test_series_groupby_value_counts_on_categorical():
+    # GH38672
+
+    s = Series(Categorical(["a"], categories=["a", "b"]))
+    result = s.groupby([0]).value_counts()
+
+    expected = Series(
+        data=[1, 0],
+        index=MultiIndex.from_arrays(
+            [
+                [0, 0],
+                CategoricalIndex(
+                    ["a", "b"], categories=["a", "b"], ordered=False, dtype="category"
+                ),
+            ]
+        ),
+        name=0,
+    )
+
+    # Expected:
+    # 0  a    1
+    #    b    0
+    # Name: 0, dtype: int64
+
+    tm.assert_series_equal(result, expected)