Challenge of taxing a digital economy

The digital economy is here with us, but we are not ready for it. We need it to improve on our inefficiencies and reap its full benefits.

Although there is no going back, the informality of the digital economy is increasingly becoming a challenge to tax collectors.

Recent remarks by Maina Kamanda, chairman of the National Assembly’s Transport committee, that they may consider regulating Uber because it is disrupting the traditional taxi industry demonstrates failure to grasp the extent to which digital economy has spread.

It will be defeatist if we had a policy on product by product within a large industry. The digital economy cuts across many sectors. For example, hotel owners within the tourism sector will soon start to make noise about the disruptiveness of airbnb and fairness in terms of tax.

Taxation challenges in the digital economy are far wider than in the Transportation sector. We need more comprehensive tax reforms to cover the many e-services that are difficult to establish where value is created.

These include: e-learning services from foreign countries, gaming, lotteries, e-commerce platforms, freelance platforms, Internet-based auctions and adverts, and the supply of music, audio visual content, still images and other kinds of digital content.

Others include: Subscription services to journals, newspapers, blogs, magazines, games, internet-based auction services, publications, periodicals, social networking service, web applications, web series webcast, webinars and websites.

The challenge of taxing these services is how to balance between creating an enabling environment for innovation while fairly taking that which belongs to the government. A 2014 UN Department of Economic and Social Affairs paper, ‘‘Protecting the Tax Base in the Digital Economy’’, says the mass adoption of connected digital services by consumers, enterprises and governments, which can be defined as digitization, is stimulating economic growth.

It may therefore be counterproductive if punitive taxes are imposed without consideration of the role this new economy is bringing to especially developing countries.

Punishing innovation through excessive taxation is failure to understand the role of innovation in economic development.

Innovative countries are more productive and their economies grow faster. For example, the introduction of mobile money has helped create new enterprises, improved trade, and created unprecedented efficiencies thus contributing to economic expansion.

Taxi hailing services have had both social and economic benefits. They have destroyed cartels that controlled sections and regions of different cities, and made taxis more affordable.

As they say, wherever there is a conflict, “follow the money.” The issue is not the innovation, but money.

Somehow, Mr Kamanda may have been expressing frustration for lack of a comprehensive policy that protects the interests of business, players, the consumers and the government.

To ensure fair competition, every player in the industry must pay taxes. How they pay the taxes and ensure existing enterprises within the industry and under local tax regime compete fairly is the elephant in the room.

Many countries are grappling with how to effectively manage the emerging digital economy. In each country, the policy stipulates tax measures for business-to-business (B2B) and business- to- consumer (B2C).

Japan, with a fairly straight-forward policy, introduced a consumption tax in 2015 with an annual threshold of 10 million yen.

A consumption tax rate of eight per cent is charged on all B2C ecommerce transactions delivered by foreign businesses to Japanese consumers (Japanese businesses were already paying this and the idea is to level the playing field).

In December 2016, India introduced new electronic/online tax measures requiring the service provider to charge a total tax of 15 per cent and deposit it with the government by the sixth day of the following month.

Like Japan, service providers without a physical presence in India must appoint a local tax agent. Since 2014, South Africa has levied a VAT charge one per cent for electronic suppliers.

VAT is not required for sales below $3,000 but unlike other countries, there is no distinction between B2B and B2C.

Conflicts between local enterprises and multinational digital companies will persist until we develop a comprehensive policy that takes into consideration the interests of existing enterprises, the consumers and government tax requirements.