On 9th August 2019, KEPSA participated in an Industry Roundtable on Digital Market Place Taxation at the Radisson Hotel. The purpose of the forum was to discuss and gain consensus on the two digital platforms tax proposals provided for in the 2019 Finance Bill.
Among the key issues raised by the stakeholders with regards to the proposals given were that they interfered with fundamental rights of freedom of expression (FOE) and the right to information (or RTI) as recognized by the Constitution of Kenya and international law.
The proposals therein as outlined include:
Section 3 of the Income Tax Act is amended by “inserting the following new paragraphs immediately after paragraph (c) –
(d) income chargeable to tax includes income accruing through a digital marketplace.
Section 5 of the Value Added Tax Act, 2013 is amended by inserting the following new subsections immediately after subsection (6)—
(7) The provisions of subsection (1) shall be applicable to supplies made through a digital market place
(8) For the purposes of this section, “digital market place” means a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.
Stakeholders in the forum opined that the proposed provisions did not recognize the adverse impact that this would have on the nascent digital economy. The provisions would stifle the dynamism of the same due to the imposition of heavy taxation burdens.
To support this, a presentation on ICT regulation and Financial regulation was made and reference drawn to a paper on “Taxing mobile phone transactions in Africa- Lessons from Kenya” by Njuguna Ndung’u. Based on the presentation, it was noted that increased tax on the digital economy does not necessarily expand the tax base but rather reverses the gains on retail electronic payments and financial inclusion.
These arguments are premised on the tax adjustments in the Finance Act 2018 which overall increased the tax on money transfer services by banks, on telephone services (airtime), on mobile phone-based financial transactions, and introduced a 15 percent excise tax on internet data services and fixed-line telephone services.
These higher tax rates are expected to increase tax revenue to the Government. However, it is feared that these tax increases on low-level retail electronic transactions that mostly affect low-income earners may discourage the use of mobile phone-based transactions, incentivizing them to revert to cash transactions to evade taxes and so less tax revenue.
Based on the foregoing it was proposed that;
- The definition of a ‘digital marketplace’ as currently provided for needs to be amended. In its current form, it is vague and fails to specify which platforms fall under this tax bracket (i.e., start-ups, corporations, cloud platforms etc.,) and how they will be taxed (i.e., proposed calculation of tax to be imposed). Additionally, the definition imposes a liability on the tech platforms to break end-to-end encryption of some of their platforms and keep snooping what consumers are doing and this goes against Article 31-33 of the Constitution of Kenya. Intermediaries merely act as a conduit for third-party suppliers and buyers, including foreign platforms with no physical presence in Kenya.
- The implementation of the tax imposition should be postponed until a cost-benefit assessment has been conducted and takes account of the difficulty latent in determining the economic presence in dynamic digital transactions. This is to prevent or buffer against the adverse impact that additional income taxes would have on online entrepreneurship resulting from the disproportionate application of tax on small and medium digital platforms already grappling with financial and tax burdens
Following these in-depth discussions and concurrence on the issues, the sector members adopted the proposals above, which were included in the KEPSA submissions to the Finance Bill, 2019. These were later submitted to the National Assembly on the same day for consideration.