Taxing the digital economy might be a tough task

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Taxing the digital economy might be a tough task

Thursday, June 18, 2020 0:01

By BASTON WOODLAND

The Budget Statement for the fiscal year 2020/21 is special for the simple reason that it was made at a time when the country is facing extreme economic challenges due to the current global pandemic.

Therefore, there was a need to balance between generation of revenue and stimulating the economy to safeguard businesses for a smooth path towards economic recovery— Whether it achieved this or not, is a topic on its own.

However, for good measure and time, I’ll only talk about the proposed 1.5 percent digital service tax on the value of digital transactions.

Many have opined that digital commerce is currently operating in a tax and traffic-free environment. These and the general projections of an increase in e-commerce have prompted governments and tax authorities to come up with modifications to tax such transactions.

A question many would ask is why such transactions should be brought within the tax net? First, the argument by the taxman has been that there is a huge revenue loss on the digital economy.

Secondly, e-commerce enterprises enjoy unfair advantages over physical businesses due to the lack of any legal obligation to impose or collect VAT on e-commerce sales.

How will this then be resolved? In the Budget Statement, the Cabinet Secretary proposes the introduction of a 1.5 percent digital service tax on the value of any transaction payable by a person whose income accrues through a digital marketplace. A digital marketplace is further defined as “a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means".

Therefore, if the Finance Bill, 2019 is passed into law, there’s a good chance that we will see taxation on internet service providers, sale of digitized goods and services i.e. books, music, pictures, and visual materials.

However, the CS still has another hurdle to face. He needs to come up with regulations to operationalise the implementation of the digital service tax. This is where things might get a little interesting. The digital economy is an "amorphous" space delivering waves of innovation and a shift in market dynamics hence the proliferation of multi-sided markets.

Whereas it's a market that needs to be brought under the tax net, handling and regulating it might prove to be a practical nightmare for now, because of the following reasons: (1) Difficulties like uncertainty and double taxations; (2) Taxation policies based on concepts like permanent establishment or physical presence; sale points, taxation point, product, and income classification; (3); Locally, e-commerce is proving to be the backbone of youth employment and not a well-thought-out taxation policy will only affect the development of e-commerce negatively, with the likelihood of affecting many youths.

The question then is “How can the Government develop e-commerce with proper tax regulations?” At this point, it's noteworthy to highlight that one of the key points in the Budget Statement by the Treasury Secretary Ukur Yattani touches on “Digitalising our Economy” under which he acknowledges, and rightfully so, that our prosperity as a country is hinged on our ability to take full advantage of the rapid technological advances.