Rodgers Kemboi is a Digital Tax Expert
Over the recent years there has been an increase in digital transactions and a shift in how business is being done globally. The Kenyan economy has undergone a substantial transformation through digitalisation. Kenyans can now access content, buy stuff, sell stuff, set up their own platforms online, and transact with many other platforms from all over the world. However, despite the growth, we have not seen the same being reflected in tax collection.
There has therefore been a need for Kenyan Authorities to rethink everything, and come up with a strategy that ensures that the obvious growth witnessed as a result of digital services is reflected in revenue collection. The digital economy has largely remained untaxed due to the nature of transactions involved.
What is Digital Service Tax?
The Digital Service Tax (DST) is tax payable on income derived or accrued in Kenya from services offered through a digital marketplace. A digital marketplace refers to a platform that enables direct interaction between buyers and sellers of goods and services through electronic means.
What are the rates?
The Digital Service Tax (DST) shall be charged at the rate of 1.5% on the gross transaction value. DST applies in the following cases:
- In the case of the provision of digital services, the payment received as consideration for the services; and
- In the case of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the platform
Note that: The gross transaction value is exclusive of VAT (Value Added Tax).
What Services shall attract DST?
All the following services shall be expected to remit DST:
- Over-the-top services, streaming television shows, films, music, podcasts and any form of digital content
- Sale of, license of or any other form of monetising data collected about Kenyan users has been generated from such users’ activities on a digital marketplace
- Subscription-based media–news, magazines and journals
- Streaming Services & transmission of data-monetised
- Downloadable digital content including apps, games, music, e-books
- Electronic data management: Web Hosting, Data Warehousing, File sharing and Cloud Storage
- Marketplaces, Websites that connect buyers and sellers e.g Airbnb, Taxi hailing services
- Search Engines & Help desk automation services
- Ticketing platforms; for live events, theatres, or restaurants
- Distance Learning Via pre-recorded medium or e-learning, including online courses
- Any other service provided through a digital marketplace that is not exempt under the Act
DST will be applicable in cases where the digital service or supply on a digital marketplace is provided to a user located in Kenya.
How will user location be determined?
A User shall be deemed to be located in Kenya if any of the following parameters are met: -
- Payment for the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya.
- The user accesses the digital interface from a terminal (computer, tablet or mobile phone) located in Kenya.
- The supplies or digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya.
- The user has a business, residential or billing address in Kenya.
For non-residents, digital service tax will be a final tax and shall be administered by representatives to be appointed by the Kenya Revenue Authority (KRA). For Kenyan residents, it will be treated as advance tax to be offset against taxes payable in the course of the financial year.
Exemptions of DST?
The following instances shall be deemed to be exempted from DST:
- Income that is already subject to withholding taxes.
- Financial institutions and platforms that offer financial services such as payment gateways, money lending etc.
- Governments platforms that offer access to government services
Final thoughts on DST
In Africa, a couple of countries are already implementing some form of DST, with more countries expected to follow suit in the coming years. One of the negative impacts of the new tax is that there’s really nothing stopping digital providers from passing on the charges to the consumer thus increasing pricing of services.
On the other hand, however, the introduction of DST establishes a level playing ground for all business. It promotes equity and fairness regardless of the business model. A lack of an ideal taxation framework has for a long time seen most businesses in the digital economy operate without remitting their fair share of the revenue.
DST will ensure that international companies that dominate the Kenyan digital space will contribute to the Kenyan economy since they will plough back the income they generate from its Kenyan users. It is a remarkable step by the government in efforts to increase tax base and collect more revenue.