Elewa Job Opportunity // Education Innovation Lead. Apply Before 15th March.
March 9, 2021
Pitch Ready // 7 Ways to Prepare Before Approaching Investors
March 12, 2021
Digital Service Tax (DST) // The Bittersweet Income Tax Addition of 2021
By Lenkidi Mapa
The pandemic has greatly propelled the digital economy that was already on the rise. There has been a significant boost in the use of digital services with most, if not all digitizing their operations. On 1st January 2021, the Government of Kenya vides the Finance Act introduced the Digital Service Tax.
On 12th March 2020, the Ministry of Health confirmed the first positive COVID-19 case in Nairobi. Even though the country did not experience total lockdown, most businesses and SMEs shut down physical operations as the movement was minimized.
It meant that our lives were literally turned to banging keyboards, purchase of goods, and provision of services shifted online.
While taking a mile of celebration from the pandemic break gave us little did we know that as the positive cases would rise, so would the cost of living, taxes, and the country’s debt ceiling.
Kenyan treasury in efforts to wrestle with all hard issues identified the digital economy as a focus area. For taxation in order to grow tax revenue and trying to paint a rosy picture amidst the increasing budgetary pressures…Where do we go??
Subjects of Digital Service Tax
Digital Service Tax is not aimed at ordinary people selling online or local SMEs innovating in the digital space. The young entrepreneur selling handbags on Facebook, or your good friend always asking you to follow their Instagram page where she sells shoes has nothing to get apprehensive about.
For goods sold on social media platforms, the supplier is required to declare the income earned under the self-assessment regime provided under relevant tax laws.
The target is the man behind the veil who provides a platform for buyers and sellers to interact, the online mafia specializing in Artificial Intelligence, cloud computing, digital streaming, and e-commerce.
However, the net effect will eventually trickle down to that friend/relative selling or purchasing online. They shall bear the cost.
Digital Service Tax will apply to both residents and non-residents who are either;
- Digital Marketplace Providers – persons providing a platform enabling direct interaction between buyers and sellers of goods and services through electronic means.
- Digital Service Providers – persons providing digital services through a digital marketplace.
Exemptions to Digital Service Tax
Digital service tax shall not apply to income tax that is subject to withholding tax in Kenya. It will also not apply to the income of a non-resident person carrying on the business of transmitting messages by cable, radio communication, optical fiber, TV broadcast, or any other similar communication.
Income from online services facilitating payments, lending, or trading of financial instruments and foreign exchange by financial institutions authorized by CBK is also exempted from Digital Service Tax.
Digital Services Subject To The Tax
The digital services enlisted under regulation 3 include; downloadable digital content, streaming of digital content, any form of monetizing data about Kenyan users, subscription-based media, data management using electronic means, online sale of tickets, search engine-related services, and e-learning.
How Digital Service Tax Is Computed
Digital Service Tax shall be imposed at the rate of 1.5% of the Gross Transaction Value which is the consideration received in respect of the service provided in the case of a digital service provider. One is required to submit a monthly return using a prescribed form and remit DST by the 20th day of the month following the end of the month that the digital service was offered.
Persons liable to DST are required to keep records in line with the provisions of the Tax Procedures Act. Kenya has a Five (5) year statute of limitation rule implying that such records should be kept for a minimum of five years. Failure to comply with the Digital Service Tax compliance provisions will be subject to penalties prescribed by Kenyan Tax Laws.
How It Should Be Paid
One will be required to submit a monthly return using a prescribed form and remit Digital Service Tax on or before the 20th day of the month following the end of the month that the digital service was offered.
Implementation
Digital Service Tax is a new form of tax in Kenya and in many parts of the world. There is a likelihood that it will face challenges on implementation and enforcement. However, with continuous refinement and alignment to the best practices, the country is optimistic that in the long run the hurdles will be overcome.
And I’m Done…
The last two years have seen a number of European and Asian Countries introduce the Digital Service Tax to their regimes. The introduction of Digital Service Tax is, therefore, not unique to Kenya. France, India, Singapore, and the United Kingdom are good examples.
However, it can be argued that most of the aforementioned countries have mature digital economies. Kenya’s digital economy is still in diapers and needs to be nurtured. Probably the Government should have considered tailoring the regulations to meet the country’s unique economic situation as opposed to copy-pasting the tax regulations from those developed economies. For instance, a minimum threshold should be set for the applicability of Digital Service Tax and exemptions for businesses with low margins.
A random comparison shows that in the United Kingdom only large businesses are liable to Digital Service Tax, businesses with in-scope annual global revenue of more than Euro 500 Million whereas in France and Italy the threshold is Euro 750 Million.
Kenya should get the strategy right and stop behaving like a Chinese bull in a shop regarding the threshold perhaps by aligning it to the turnover tax threshold or other reasonable thresholds.
Lenkidi Mpapa is a Lawyer at Kimani Mwangi Advocates LLP. Get in touch with him via lenkidi@kmallp.co.ke
