The saying goes that only two things in life are constant; Death and Taxes. If you are reading this it means that you haven’t experienced the first and are probably sick of the second. Despite your love or hate for taxes, as long as we live under a democratically elected government you will have to pay them. Like death, taxes have a habit of catching up with us eventually. If you don’t pay them now you will have to pay them later with interest.
The Kenya Revenue Authority has for days on end complained about its inability to meets its collection target with many Kenyans especially those in the informal sector evading the payment of taxes on their incomes. This means that the tax collection burden has largely fallen on the small percentage of Kenyans who are employed and on formally registered businesses. Some see this as unfair because everyone gets the benefit of government services from public servants who are paid by taxes.
To make up for this collection shortfall the government has incurred high loans from foreign and global lenders which have led to massive public outcry. So bad is the government’s borrowing habit that Parliament has had, on several occasion, to raise the debt ceiling higher. All of these have led to lots of pressure on the National Treasury to improve its collection capacity. This is why all eyes have now turned to the digital space.
The digital sphere has remained largely untouched by taxes in Kenya. The major players in the digital market are e-commerce platforms that have grown into household names such as Jumia, Jiji and Kilimall. Until recently the government has only taxed the general corporate tax based on their annual income and other adjacent taxes that relate to their businesses but none on their utilization of the Kenyan digital space.
However, with the introduction of the digital services tax early this year, this state of affairs has taken a dramatic shift. The digital services tax is a tax that is payable from any income derived or accrued in Kenya through a digital marketplace. This tax is payable at the point of payment for a transaction. Under the legal regime governing digital taxes, a digital marketplace is a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.
The Digital Service Tax was introduced in Kenya through the Finance Act, 2019 and enacted through the Finance Act, 2020 with an effective date of 1st January 2021. It was introduced to both the Income Tax Act (“ITA”) and the Value Added Tax Act (“VAT Act”). The tax applies to a person whose income is earned in Kenya from the provision of services through a digital marketplace.
The digital service tax applies to downloadable digital content including downloadable mobile applications, e-books and films, over-the-top services including streaming television shows, films, music, podcasts and any form of digital content. What this means is that the tax is payable when you purchase a book from an online shop or a song from Mdundo. It is also payable when one subscribes to an online newspaper or magazine. What this means is that when you subscribe to the Daily Nation newspaper at Kshs 50/=, the Daily Nation newspaper is obligated to pay 1.5% of that as tax. It also means that Netflix and Showmax have to pay this tax for every time you subscribe and pay for a month of binge watching your favourite TV series.
It is also applicable to electronic booking or electronic ticketing services including the online sale of tickets which means that the online ticket seller will be obligated to pay 1.5% of the ticket amount as tax. It is also applicable to online digital marketing services which means that if you have a company that offers search engine optimization services or any form of digital marketing you will have to pay 1.5% of whatever you earn as digital service tax.
It also applies to online courses and training which means that anyone offering an online course will have to pay 1.5% of the income generated as tax. It also has a blanket application to all the services provided through a digital marketplace which means that it’s payable by the offeror of any online services at a fee.
In conclusion, the large corporations that are obligated to pay the tax will likely find a way of passing on the burden to the consumer. The Competition Authority needs to keep a close eye on major e-commerce platforms to ensure that there is no joint price-fixing of any sort by the platforms. However, for the up and coming online seller, you need to make the necessary payments to avoid the hefty KRA penalties that come with tax evasion.