The Government of Kenya has recently introduced numerous tax initiatives with a view towards expanding the tax base in order to shore up tax revenues. This has been under the backdrop of pressure to increase revenue collection.
One of the taxes that has recently been introduced is the digital service tax which is targeted at businesses operating in the digital economy. The digital service tax obligation was effective from January 1, 2021.
Digital Service tax is not unique to Kenya. The Government of Kenya could draw some lessons from international best practices and incorporate them in the local tax code such as charging digital service tax on an annual turnover basis rather than a monthly transaction basis towards easing the compliance process.
In a bid to enhance Kenya’s attractiveness as a hub in Sub-Saharan Africa and reduce the strain on start-ups and financially constrained entities in the digital space, robust de minimis revenue thresholds could be prescribed for purposes of determining applicability of digital service tax.
It is noted that in most jurisdictions, digital service taxes are aimed at non-residents. Kenya’s digital service tax that equally applies to residents is an anomaly. At first glance, the digital service tax may seem easy to implement given its apparently straightforward computation of 1.5 percent of the gross transaction value.
However, an in-depth analysis of the legal provisions as well as the subsidiary legislation (the digital service tax regulations) reveals some intricacies and potential adverse business impacts.
Some of the areas that taxpayers are currently grappling with include the widening of the scope of digital service tax to include all services provided through a digital platform without regard as to whether the digital platform qualifies as a digital marketplace in line with the definition provided in the primary legislation.
The ability to offset digital service tax against other income taxes such as minimum tax as well as the VAT registration threshold for digital marketplace supplies is also not quite clear. There are nuances with regards to the compliance process such as the iTax portal not being configured to allow for appointment of tax representatives.
Given the challenges currently facing taxpayers, it is imperative for tax policymakers to make the necessary amendments to ensure that the digital service tax is easily adopted with minimal adverse impact to businesses.
With the anticipated release of the Finance Bill, 2021, it may be worthwhile for the government to have considered the alignment of the digital service tax regulations with the primary legislation towards avoiding ambiguities and achieving its objective of increasing tax collections. Further, the government’s revenue collection agent should ensure that there is enhanced ease in the compliance process. In the meantime, businesses should familiarise themselves with the digital service tax and comply with its provisions to avoid costly penalties due to non-compliance.
By Titus Mukora, Tax partner at PwC Kenya
