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Hits and misses of this year's Finance Bill in the digital economy and creative industry

 Comedian Eddie Butita (left), President William Ruto and American TV host Steve Harvey at Tyler Perry Studios in Atlanta, Georgia. [Courtesy, Standard]

The Government’s Financial  Year 24/25 Budget theme is “Sustaining Bottom-up Economic Transformation Agenda for Economic Recovery and Improved Livelihoods.”

One of the government’s five priority areas in this year’s Budget Policy Statement is the Digital Highway and Creative Industry.

Indeed, the digital economy presents an emerging frontier of opportunities, productivity, and competitiveness. The Government has recognised these issues and has prioritised three key areas to realise the potential of the digital economy.

These include supporting the extension of National Fibre Optic Backbone infrastructure to ensure universal broadband availability and digitising and automating all critical government processes with the aim of bringing greater convenience to Kenyans.

The government’s focus on the Digital Superhighway and Creative Economy provides context to the growth in internet connections in the country. The 2024 Economic Survey points towards a strong correlation between the number of wireless internet subscriptions and undersea bandwidth capacity.

The total wireless internet subscriptions have grown from 39.2 million in 2019 to 51.3 million in 2023 while the undersea bandwidth capacity has increased from 6.2 million MegaBytes per second (MBPS) to 17.2 million MBPS in 2023. This growth in capacity and internet data subscriptions supports the government’s focus on the National Fibre Optic infrastructure as a strategic initiative to spur economic growth.

A cursory look at the Budget Statement provides a glimpse into what the government intends to do in the digital economy and creative industry space.

Some of the planned investments include the installation of 6,700 kilometres of fibre optic cables, providing internet connectivity to 42,697 public institutions, installation of 15,000 Wi-Fi hotspots, modernising the Kenya News Agency and Government Advertising Agency to mention but a few.

Tax is a key enabler or disincentive towards the growth of this sector. The Finance Bill, 2024 contains some proposals that will directly impact this sector.

One of the proposals is the expansion of the definition of digital content monetization. Currently, digital content monetisation is subject to tax at 30 per cent, with the recipient of such services required to withhold tax at 5 per cent, as an advance tax. Given the rapidly growing digital content creation industry, the Bill proposes to expand this definition to include creative works and the creation and sharing of digital content.

A positive proposal is the proposed introduction of a telecommunication allowance for spectrum licenses. Most media houses invest in spectrum licenses to enable them to broadcast content. Such investments are significant and media houses do not enjoy a tax allowance on these investments.

This means that such entities pay tax on the foregone tax deduction resulting from the capital allowance. With this proposal, entities investing in spectrum licenses can get a full deduction of their capital expenditure over a 10-year period.

There are other proposals contained in the Bill that will have a negative impact. On Excise Duty, the Bill proposes to increase the excise duty rate on internet data services from 15 per cent to 20 per cent. This proposal comes barely a year after the reduction of the excise duty rate on the same services from 20 per cent to 15 per cent.

Further, there is a proposal to remove the relief provided to internet service providers who purchase internet in bulk for sale to final consumers. Currently, internet service providers can take a deduction of the excise duty incurred when purchasing bulk internet. This will increase the cost of internet and potential make some of the internet service providers uncompetitive.

Another proposal that may impact this sector negatively is the proposed introduction of Eco Levy on items used in this sector. Examples include transmission apparatus for radio broadcasting or television which is proposed at Sh98 per unit and equipment such as set-top boxes which is being proposed at Sh1,275 per unit.

The proposals relating to excise duty may result in increased prices of internet services, which is a key input in the creative economy space. This may result in a reduced demand for internet services. Perhaps of more significance is the uncertainty that the proposed changes will have on the sector.

With the change in excise duty rates, it may become difficult for businesses and the creative economy to adequately plan for the costs and investments required to spur the growth of their businesses.

Based on the Finance Bill proposals highlighted above, the government should adopt an integrated approach in undertaking interventions in the Digital Superhighway and Creative Economy space with the view of increasing investment, reducing costs, and providing more opportunities for Kenyans to bring out their creative best.

- The writer is a senior manager in tax at KPMG Advisory Services. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.

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