Overtaxing betting firms is detrimental to the economy

Tackling the country’s gaping budget deficit is going to hurt. So, here is a question for treasury: What would hurt more, introducing punitive taxes on industries that are seen to be booming like betting or reducing government spending on non-priority projects?

Economics tells us that targeted, punitive tax increases like the ones aimed at the betting industry hurt the economy immediately by reducing demand. Increase taxes, and Kenyans would have less money to spend. In most cases, a consensus has been reached and amicable middle grounds arrived at after honest debates on the pros and cons of any taxation regimes being put forward.

Nowhere has such highhandedness been more pronounced than in anything or any service labelled ‘sin tax’ by governments of the day. In Kenya, the latest entrants into ‘sin tax’ bracket are the betting firms that often do a clean business and follow rules set out by the Government but often are hounded out for none other than additional tax revenue.

Betting companies have come out to state their disappointment in the government’s proposal to impose an excise tax on gamers’ stakes. Stake is the amount of money risked on the results of a game. In fairer tax jurisdictions, stakes are never taxed. The proposal to tax stakes is not viable in any given economy and will definitely result in a boom in underground illegal business.

Inclusive approach

This decision does not follow any best practice and the tax, which is the first of its kind, will be detrimental to the social economic growth of the country. Constant tax increases are not an optimal and sustainable solution for building a favourable business environment.

Thus, stakeholders in the industry must join hands and encourage the government to adopt an inclusive approach, reconsider the tax and collectively craft a direction which will benefit both government and businesses in Kenya.

A few years ago, when Treasury proposed a 35 per cent tax on betting firms, the firms demonstrated how such measures would drive them out of business and the government eventually listened. If the law had passed, betting firms in Kenya would have been required to pay 35 per cent of their gross revenue to the Kenya Revenue Authority (KRA).

Despite the numerous taxes, the law still requires betting firms to pay a further 30 per cent corporation tax on their profits.

Quick mathematics shared with the relevant arms of government indicated that if such a punitive taxation measure was to be applied to the top five highest tax paying firms in Kenya, they would all sink into the loss-making territory.

Betting companies

In its place, Treasury and the gaming firms agreed on a compromise of 15 per cent tax on revenue as proposed in after the Betting, Lotteries and Gaming Amendment Act. In addition, Treasury made a proposal to have 20 per cent of all winnings to be remitted to the taxman. Save for the need for a clarification in a case where say one wins a car, this was a compromise deal for the betting companies and treasury. The 30 per cent corporate tax was also applied.

Before the amendments, all lotteries were taxed at five per cent of their sales, betting firms at 7.5 per cent, casino gambling 12 per cent and competitions like raffles 15 per cent besides other taxes and levies.

While the taxation had a few ramifications like SportPesa being unable to continue a Sh600 million annual sports sponsorship and a number of betting firms closing shop or moving their operations online, the taxation levels were agreed upon and players complied.

The government has stated its intention to control betting practices due to the side effects of irresponsible betting, gambling and gaming on the general population, but State must not lose sight of the critical tax revenue agenda, which will definitely get lost if betting companies close shop.

For the betting firms, the main issue on the table is remaining profitable without breaking any laid down laws and regulations.

In the same breath, the laws and regulations should not be punitive and high-handed and reached without any consultations because individuals have invested resources to have the companies up and running. It is only fair for both the government and the betting companies to consult and agree on a middle ground.