Where’s the big money from online investments?

The Fourth Industrial Revolution is here. Many people are now running online businesses and using digital platforms for their payments.

With the rising level of internet penetration, there has been a soaring appetite for online sales and purchases.

But with this enabler comes a huge loophole in tax collection.

Most of the online businesses believe in self-regulation. Billions of shillings worth transactions are conducted via e-commerce platforms, and the Communications Authority of Kenya estimates that the industry to be worth Sh4.3 billion.

The total Bitcoin transactions in Kenya are estimated to be worth over Sh150 billion, according to the Blockchain Association of Kenya. All these go untaxed, and the sector now taps social networks like Facebook, Twitter, Instagram and WhatsApp for marketing. Although digital disruption has created jobs for thousands of online entrepreneurs in Kenya, few of them remit taxes to the government.

Online businesses do not have physical addresses or legal structures in the jurisdictions they operate in, making it easy to escape the taxman’s net. Yet tax avoidance and evasion are some of the factors blamed for slowing down economic growth.

Kenya, like other countries such as South Africa, India, Philippines, Israel, Japan, Thailand and France, needs to begin addressing the taxation challenges with regard to digital transactions.

And there are legal foundations for this: Section 3 of the Income Tax Act, for instance, imposes tax on all incomes of a person, whether resident or non-resident, which are accrued in or derived from Kenya.

Similarly, sections 5 and 8 of the VAT Act, 2013 impose value added tax on  electronic services delivered to a person in Kenya.

In addition, the Finance Bill 2019 has  tax proposals for incomes or supplies on the digital marketplace.

The proposed amendment is meant to ensure that income earned or transactions taking place on digital platforms will be taxed in accordance with the law and after taking into account the value generated locally.

It is estimated that by the year 2070, almost every business will be conducted online. Imagine an interconnected world with 5G internet, big data, Internet of Things, blockchain and digital currencies.

Every transaction will be done online, and it is only fair that the Kenya Revenue Authority (KRA) should start preparing Kenyans for the future of taxation. KRA and the ministries of Information, Communication and Techology and National Treasury need to work together to ensure proper registration of online investments.