On Jan 2, 2021, the Kenyan government began the implementation of its digital service tax (DST) which it proposed in 2020. According to the Kenya Revenue Authority (KRA), “The Digital Service Tax (DST) is tax payable on income derived or accrued in Kenya from services offered through a digital marketplace.” The Income Tax Act (ITA) defines a “digital marketplace” as a “platform that enables the direct interaction between buyers and sellers of
goods and services through electronic means.” The tax is charged at the rate of 1.5% on the gross transaction value.
As KRA projects, the digital service tax is expected to generate a revenue of $45.5 million by the first half of this year. The introduction of this tax will affect all businesses that operate within Kenya’s digital economy, including crypto exchanges, e-commerce platforms and many more, inclusive of non-resident companies that render digital services to Kenyan residents. However, through a shocking revelation by KRA, the tax would also be applicable to social media influencers. “Social media influencers will be liable to pay digital service tax since their income is derived from or accrued from the provision of services through a digital marketplace or by providing digital advertising services in Kenya,” KRA declared.
The Kenyan government believes that the digital economy in Kenya has experienced immense growth, yet all the growth has not impacted the country’s revenue. Joe Mucheru, Cabinet Secretary, Kenyan Ministry of Information and Communication Technology, says, “We cannot give up everything as a country and attract people, and then there’s nothing that we are necessarily benefitting as a country.” According to KRA, the DST is being implemented to “Address the changing business models, and expand the tax base and ensure equity, fairness and neutrality in taxation between traditional methods of doing business and the new ways of transacting over digital platforms.”
Emphasizing the importance of introducing this tax, commissioner of the domestic taxes department at the Kenya Revenue Authority, Rispah Simiyu, says, “The increasingly digital marketplace] is a promising platform for revenue generation, and realignment of tax collection mechanisms is of urgent necessity. It provides an avenue for multinationals to contribute to the growth of the country where they derive their income. This will strengthen the moral business case for international commerce as practiced in Kenya.”
However, many people believe that the Kenyan digital economy is still in its nascent phase, hence, the introduction of the new tax could impede its growth. According to a report by Citizen TV Kenya, several industry players express warnings that the new tax may thwart the growth of e-commerce in the country. The report indicates that many traders are requesting for more time because the industry is still in its infancy. A Kenyan digital marketer also took to Twitter to express her view on the DST, opposing the improper timing of introducing the tax. According to her, “No one is opposing DST as a policy in itself, but we will get there. Kenya is still navigating the digital tech world. Given that technology is undisputably our new normal, there will be time to properly allocate tax for big players in this industry. Not now.”
A major cause for concern on the DST is the existence of digital-driven businesses, especially e-commerce companies, who have very thin margins, and may be unable to adhere to the DST policy without increasing the prices of their services or risk collapsing. Forcing such businesses to increase the prices of their services to accordingly adjust their financial model will have negative effects on their Kenyan customers who will have to pay more to access these services. Considering that not every Kenyan will be willing to pay more to access these digital services, in the case of a price increase, the digital economy in Kenya may lose a lot of users, just like Uganda lost nearly 30% of its internet users between March and September, in 2018, due to the introduction of a digital service tax that required Ugandans to pay a daily duty tax of Ush 200 ($0.05) to access social media sites.
In a 2020 Tax Alert publication by Deloitte, the respected professional services firm suggests another cause for concern in Kenya’s DST policy. “Our view is that the GoK should have considered setting a minimum threshold for applicability of DST and exempting some businesses with low margins. Imposing DST on all digital services irrespective of the threshold is likely to result in undesirable implications especially for persons under the Turnover Tax Regime and minimum tax, and whose primary income is derived from provision of digital services,” the publication stated. Making references to foreign governments that have also implemented a digital service tax, Deloitte added that “In the UK, for example, only large businesses are liable to DST, that is businesses with in-scope annual global revenue of more than £500m, of which more than £25m are attributable to sales from the UK. For France, the thresholds are €750m and €25m for global and local sales, respectively while for Italy the threshold is €750m and €5.5m for global and local sales, respectively. In Kenya, the threshold could be aligned to the turnover tax threshold or other reasonable threshold.”
There is no doubt that the DST policy is received with mixed feelings amongst observers and industry players. With Kenya’s DST in place, one cannot help but wonder if this is the right time for the government to tax the country’s digital economy in order to increase revenue, which could help in servicing the country’s heavy debt burden and effectively running its economy. On the flip side, there is a concern about whether the implementation of the digital service tax is a step that is too soon to be taken. It would be difficult to come up with an absolute answer to these questions now. However, the turnout of events in the course of the year may likely indicate if Kenya has taken a progressive step.