Digital service tax misses point, ill-timed
- The Sh2 billion the KRA is expected to raise from the Digital Service Tax may not only happen but has adverse effects.
- In Kenya, the tax applies to almost all digital services, placing the country in a competitive disadvantage to attract digital investment.
Starting January 1, the Digital Service Tax will come into effect, as passed in the Finance Act 2020, payable at 1.5 percent of the gross transaction value of service due at the time of transfer of the payment to the service provider.
Now, there is an economic case of the need to expand the tax base by capping tax-avoidance. But taxing the digital economy is a complex policy issue world-wide, and countries are taking time to find the right fit.
The Sh2 billion the KRA is expected to raise from the Digital Service Tax may not only happen but has adverse effects.
First is the design of the digital tax. In France, a digital tax of three percent was introduced but levies on the revenue of large digital platform companies earned from advertising, online intermediation, or transmission of data.
But the burden is lessened, whereby, the tax was introduced to raise alternative revenue to gradually reduce corporate tax rate to 25 percent in 2022. The EU legislation provides clarity on liability of services that are digital, so services provided over email, newspaper advertising, posters and TV, distance learning are exempted.
In Kenya, the tax applies to almost all digital services, placing the country in a competitive disadvantage to attract digital investment.
Second, digital services tax portends to be a grim reaper to the whole digital economy space. We can look at the e-commerce sector, poor governance is claimed to be the malfeasance causing the death of Kenya’s top retail chains.
But behind the veil of poor governance is that retail chain operates razor-thin margins of around 1.5 percent to 3.8 percent and this is also the scenario for the e-commerce sector.
So, introducing a 1.5 percent tax is simply a price distortion, heavily impacting the thin margins. An increase in price through taxation will reduce the number of customers using the platform, thus hurting their margins badly.
This price distortion is not confined to the e-commerce space but the entire digital services liable. This will have a negative impact on the sustainable digital economy Kenya has been trying to build
Now, there is an argument that retail chains are struggling because e-commerce has eaten into their market, but proponents need to provide data to support this argument because there is no trend supporting it.
E-commerce is nascent in Kenya; the penetration is largely among a small urban class of population when retail chain is fragmented but covers a wider population.
Also, retail chains have also introduced online shopping.
Third, Kenya’s problem of failing to expand its tax base is largely a structural problem. The economy is not improving incomes or creating sustainable opportunities, so the taxable population outside VAT remains the same cohort across the various applicable taxes.
Adding digital service tax on the bill of an overburdened population will simply make them averse and will find ways to go around the tax system to access those services informally.
Lastly, the timing of the coming into effect of the digital service tax is a concern, especially to start-ups and small businesses.
We seem to have a ‘don’t-care’ tax policymakers, Treasury and Parliament who draft and pass tax laws.
According to the recent World Bank Economic Update, the economy condemned two million Kenyans to poverty with many other losing livelihoods.
Then in the same economy comes the introduction of digital taxes at the same time with the abolishment of the Covid-19 tax reliefs.
This begs the question of whether tax policymakers of this country feeel the pulse of the economy in the first place because the coming into effect of those taxes is ill-timed. Where are the livelihoods to tax?
It would be advisable that the taxes coming into effect on January 1 be reconsidered for better timing.