How the digital service tax works
The Digital Services Tax was introduced through the Finance Act 2020 and started being operational on January 1, 2021.
The tax is charged at a rate of 1.5 per cent of the gross transaction value and is payable by persons, both residents and non-residents, who derive or earn income in Kenya through provision of services on the digital market space.
Some of the digital services to which DST will apply include provision of digital marketplaces that connect buyers and sellers, streaming and downloading of digital content such as music, media-based subscriptions like e-journals, electronic data management and online ticketing, among others.
For non-residents, DST is a final tax and shall be administered by tax representatives to be appointed by Kenya Revenue Authority.
Such non-resident business to business (B2B) suppliers are not brought under the Kenyan tax framework where they can claim input tax for goods ultimately sold by local sellers on the digital marketplace.
Consequently, a Kenyan importer of goods to be traded on the digital marketplace is required to notify such overseas suppliers that they are not required to account for tax relating to Digital Services Tax.
This distinction between B2B and business to consumer (B2C) suppliers is a helpful guide for overseas suppliers who may be unclear on this aspect.
On the other hand, for Kenyan residents, DST will be treated as advance tax to be offset against taxes payable in the course of the financial year.
People who have income sources that are already subject to withholding taxes are exempt from DST .
This dispels the fear that DST might choke local businesses operating in the digital marketplace and start-ups contemplating investment in online shopping.
It further rules out cases of double taxation for local businesses.
The introduction of DST establishes a level playing ground for all business hence promotes equity.
Lack of an ideal taxation mechanism has for a long time seen most businesses in the digital market place operate without remitting their fair share of revenue.
This explains failure of the vibrant growth of business activity in the digital market to impress the revenue coffers.
The result has been an undue advantage for such businesses over tax compliant businesses operating under the conventional business model.
Introduction of DST therefore balances this equation and fairly spreads the tax burden.
Apart from levelling the ground for businesses, DST will also expand the tax-base.
KRA projects to collect more than Sh5 billion in the first six months of implementation of this new tax head.
Tax-base expansion is one of the most effective modern day tax administration strategies of widening the tax net and generating more revenue.
Implementation of DST will also ensure that non-resident enterprises which dominate the digital marketplace plough back the income they generate within Kenya.
In other words, DST 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