Digital service tax idea might flop

The Cabinet Secretary in his 2020 budget speech finally pronounced himself on the digital tax question and slapped a 1.5 per cent tax on services offered online.

I had previously written on the pros and cons of a digital service tax – from the perspective that it targeted the usual suspects, that is, the big international platform players such as Facebook, Amazon, Apple, Google and Netflix.

My submission then was that as the economy shifts to the digital space, both domestically and globally, Kenya must begin to think through and design how to gain its rightful share on the digital transactions.

I had however cautioned that these big platform players, some of whom have annual revenues ten times bigger than the Kenyan budget, will not feel obliged to comply with some insignificant tax laws imposed in some ‘remote’ African country.

And you may not blame them too much.

Imagine a company like Netflix or Facebook being forced to have a tax presence in say fifty African countries, each imposing different tax regimes on its services and yet the total revenue for its African market is a small, insignificant portion of their global revenues.

The decision such a company has to make is whether it is cheaper to comply – by instantiating tax presence in each of these fifty countries or simply ignoring them since the cost of deploying and sustaining the tax presence may be higher than the revenues accruing from the African market.

TRADE WARS

Whereas India, France and other bigger economies have implemented similar digital service tax regimes with a better success, they have also attracted retaliatory trade wars with the US administration.

I highly doubt that Kenya is in that league and most likely the big platform players would chose to ignore our digital tax regime until such a time when the proportion of our digital transactions becomes significant on their balance sheets.

Which begs the question – why couldn’t the African Union, or at least the East African Community put together a joint digital tax regime?

Going it alone as Kenya would have little impact.

In fact, after reviewing the proposed regulatory and implementation framework, I am convinced the local eCommerce start-ups are the ones that may get hit by the digital tax more than the big international players.

Many innovators or start-ups have cropped up, particularly over the last three months of Covid-19 lockdown in order to provide services online.

Section Four of the regulations is particularly instructive and states, in part as follows:

Taxable supplies made through a digital marketplace shall include electronic services under Section 8(3) of the Act and: -
(a)Downloadable digital content including downloading of mobile applications, e-books and movies;
(b)Subscription-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming;

Just to highlight a few examples, all those start-ups that have come up to deliver e-education services will be immediate candidates for this digital tax. All those DJs who are offering online entertainment services will also fall under this tax regime.

I am not arguing that they should not pay this digital tax. I am just concerned that they would be competing with international service providers who have the power to ignore this digital tax,  while they do not enjoy the same advantage given that they are smaller and domestic hence easier to clamp down on.

Could we be indirectly promoting global players even as we try to target them, at the expense of our local start-ups that are trying to enter the digital market place?

Why would Wanjiku enrol for a local online program that has been made more expensive due to digital taxation when she can access a cheaper equivalent offered by a global competitor?

There are no quick answers to these questions. I only hope the Kenya Revenue Authority is alive to the disparities and thinking overtime about them.

Mr Walubengo is a lecturer at Multimedia University of Kenya, Faculty of Computing and IT.
Email:, Twitter: @Jwalu