Thoughts on the National Budget, New Digital Tax and Other Tax Stories

Uhuru Kenyatta

On 11th June 2020, Treasury Cabinet Secretary Ukur Yatani read the Country’s 2020/2021 Financial Year Budget. There have also been looming conversations and buzz around the proposed Digital Tax issue that will greatly affect tech startups, SMEs, service providers at all levels of the value chain as well as the digital consumer. 

At the start of the year, the economy was projected to grow by 6.1 percent in 2020, which was an improvement from 5.4 percent in 2019. That was before COVID. With COVID, growth is now projected at a lower rate of 2.5 percent in 2020 down from the 5.4 percent growth recorded in 2019. 

Under the Economic Stimulus Programme, for SMEs, the CS announced Ksh 3.0 billion seed capital to operationalize the Credit Guarantee Scheme. Furthermore, it is proposed to fast track payment of outstanding verified VAT refund claims and pending bills owed to businesses by allocating Ksh 10.0 billion. This is in addition to the Ksh 23.1 billion approved by Parliament in April 2020 in the Supplementary Budget for the same purpose.

A plus for the local industry is the Government’s affirmation to gazette the list of items for local procurement to promote the “Buy Kenya Build Kenya” Initiative. Also, the proDsigitposal on the duty-free application for mobile phone assembly parts. This means that Inputs for assembly or manufacture of mobile phones will be imported duty-free under the East African Community Duty Remission Scheme.

For the Overarching ICT Space, CS Yatani proposed allocation of Ksh 14.9 billion to fund initiatives in the ICT sector. 

Specifically, the Government is fast-tracking the establishment of the Konza Technopolis City with enhanced allocations to the project. Ksh 6.3 billion for the Horizontal Infrastructure Phase I (EPCF) for Konza; Ksh 400 million for the on-going construction of Konza Technopolis Complex Phase 1B; and Ksh 5.1 billion for Konza Data Center & Smart City Facilities project.

As part of the Post COVID – 19 strategy, the government envisages an increase in investment in ICT and digital infrastructure to support the use of digital platforms to facilitate e-commerce and efficient delivery of public services.

The Digital Services Tax

The law has proposed a new tax rate of 1.5% on the value of transactions

Digital Service Tax and the need for techies to dive into public participation

When the Finance Bill was tabled in parliament earlier in the year, a proposal for a digital service tax (now popularly known as DST) was made. A number of players in the tech community got together to see if interventions could be made through public participation to avert the upcoming tax obligation. There were suggestions that the tax should only apply to companies not resident in Kenya as local companies already pay VAT and other tax obligations like corporation tax hence the additional tax would just be an extra burden for them. Other suggestions included the lowering of the proposed percentage and even a suggestion to completely do away with the tax proposal. Well, it is safe to report that the pleas of the industry went unheard.

Taxation of the digital economy has been on the mind of policymakers for a while. It is however noteworthy that the players in the digital economy/ marketplace have always had an obligation to pay taxes, I guess enforcement has been an issue hence the enhanced policy interventions.

In the Finance Act 2019, a definition of the digital economy was given together with a declaration that taxes ought to be paid for revenues derived from the digital marketplace. The Finance Act of 2019 defined the digital marketplace as follows:

“digital marketplace” means a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means;

The digital market is quite a broad definition with players from different quarters right from payment platforms, e-commerce platforms, those engaged in online work and those who sell various products and services online including advertising. 

In 2020 however, policymakers made a clear indication of how taxes would be collected from the digital marketplace through the introduction of the digital services tax, popularly referred to as DST.  Today, all players in the digital marketplace will be expected to pay I.5 percent of the gross transaction value to the taxman.

In addition, the law now makes a provision for the Kenya Revenue Authority to appoint an agent for the purpose of collection and remittance of digital service tax. So basically even if a company doesn’t have a local presence or isn’t registered locally KRA may appoint a tax agent to collect taxes from that entity.

There is however a reprieve for resident persons or a non-resident person with a permanent establishment in Kenya as they shall have an opportunity to offset the digital service tax paid against the tax payable for that year of income. The catch however is that DST shall be due at the time of the transfer of the payment for the service to the service provider.

DST shall come into force in January 2021. The digital economy is not only broad and ubiquitous but also quite intertwined with several players having a role in a single transaction. Industry players will have to work hand in hand with the regulator to clearly explain which point their obligations start and at which point they end. For example, if you order a burger from your favourite restaurant through a third party online platform like Glovo or Uber Eats 1.5% of the gross transaction value will be charged, the question here is which of the two players remits the tax? Is it the online platform or the restaurant?

During the parliamentary debate on the Finance Bill 2020, there was a general assumption by MPs that DST was about taxing the youth. There were mixed opinions on the digital service tax. Roughly ‘40%’ of members of parliament who spoke felt like it was going to hinder the growth of youth industries. There was a ‘20%’ that felt that the tax should be imposed but with checks to protect Kenyan youth such as having a set minimum that may be exempted. The other ‘40%’ of members of Parliament supported the tax with some saying that it will teach the youth how to pay taxes. Other members stated that the tax is for non-resident companies as residents can always claim back the 1.5% when paying the other taxes.

The above snapshot of parliamentary debates on DST indicates that there is a lot to be done by the digital ecosystem in helping stakeholders understand the intricacies of the tech industry and its intersection with every other industry.

Players in the digital economy have a huge responsibility to engage with policymakers so that they can positively contribute to shaping regulations that will affect their operations. They will have to engage policymakers and implementers to help demystify the maze that is the digital economy. They will have to be at the forefront to give clarity on their operations so as to help distinguish their tax obligations to KRA and Treasury.  So techies….let’s talk policy!

– Co-authored with Rosemary Koech – Kimwatu