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New online services tax threatens to kill nascent digital economy

By Fredrick Juma | November 22nd 2020

The digital economy in Kenya is at the budding stage. The fact that Kenyans today depend on Apps to hail taxis, buy food, pay for transport, groceries and much more is testimony to the high levels of technology adoption, which has seen the sector grow fast in a short span of time.

As a result of this high affinity to technology coupled with a youthful, highly innovative and tech-savvy population, the digital economy has revolutionised the socio-economic landscape.

However, local companies operating in this sector are faced with an uphill task as they try to carve a commanding niche for themselves.

Being a fairly new concept, most companies are learning on the job as they go along. Unlike in the West where their digital economies are well established, ours is still making its baby steps.

Despite the fact that Kenyan digital players are busy laying a firm foundation on which future developments will grow, we cannot overlook the fact that the unconstrained nature of the internet has made it possible for competition to become global.

When it comes to online business, geography does not protect a company from competition. Without government protection, that boundless competition poses an existential challenge for local technological startups.

But on the contrary, the government is planning to introduce a Digital Service Tax to rope in transactions and businesses conducted on the digital marketplace.

Two things stand out from this move. The first is that for Kenya to compete globally, the government needs to put in place policies that support the digital industry.

Second, the tax is bound to disadvantage local digital players because applying the tax to global companies that are not registered in Kenya will be a challenge.

As a result, billions of shillings being repatriated by Facebook, Twitter, Instagram, Amazon, Alibaba and the like will largely remain inaccessible to Kenya Revenue Authority while local companies bear the brunt of the tax.

Enforcement challenge

To bring the complexity of taxation of the digital marketplace into perspective, a Kenyan tax resident can purchase commodities outside Kenya over an App such as Amazon without physical contact with the seller. The transaction is entirely conducted online as the sale is enabled through the App whereas payment is also executed online on local and international money transfer platforms.

The situation is further compounded where the seller of commodities or service provider is not registered or does not have a permanent establishment in Kenya, making it difficult for enforcement of taxation of the transaction and the business.

The digital tax does not take into consideration the intangible nature of transactions that are conducted through the digital marketplace and the fluid existence of players online. Enforcement of the tax without giving an upper hand to global players at the expense of local enterprises is easier said than done.

This is because KRA has no power to compel non-resident suppliers to charge VAT on goods and services supplied to Kenya.

Kenya, a developing country, might want to rethink if it has the financial muscle to go ahead with the implementation of the tax since a similar move has already sparked diplomatic wrangles among developed countries.

Simply put, the introduction of the Digital Service Tax by the Kenyan government is crossing the bridge before we come to it. We will only get to the bridge once we have supported our digital sector to be firm enough to compete across the globe.

- The writer is the manager at Soko Directory Investments

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