Safaricom said on Tuesday it plans to move away from giving non-cash prizes in its lottery competitions for fear that winners of goods and services may not afford to pay the withholding tax.
KRA on Monday said that all winnings will now be considered as income and thus taxable at the rate of 20 per cent of the worth of the windfall.
The taxman has backdated the effective date of the new legislation to January 1, 2014 in what could prove to be a logistical nightmare for gaming promoters to trace past winners and remit the taxes.
Consumers may no longer be offered material prizes during promotions as sponsors turn to cash following the enactment of a law that slaps a 20 per cent tax on all winnings.
Safaricom said on Tuesday it plans to move away from giving non-cash prizes in its lottery competitions for fear that winners of goods and services may not afford to pay the withholding tax.
“Majority of winners may not be in a position to raise the stipulated 20 per cent. Due to this challenge, the industry is very likely to move away from giving non-cash prizes,” said Safaricom corporate affairs director Nzioka Waita.
The Kenya Revenue Authority (KRA) on Monday said that all winnings will now be considered as income and thus taxable at the rate of 20 per cent of the worth of the windfall.
“Since the burden of the tax falls on the winners, it will be difficult to withhold the tax in situations where the winner cannot afford the 20 per cent tax, ” Mr Waita said.
The taxman has backdated the effective date of the new legislation to January 1, 2014 in what could prove to be a logistical nightmare for gaming promoters to trace past winners and remit the taxes.
“Payers of the winnings will be required to deduct the withholding tax with effect from January 1, 2014 and remit the tax deducted to the commissioner by 20th of the subsequent month,” says KRA.
Kenya’s gambling business is regulated by the Betting Control and Licensing Board (BCLB), which issues firms with permits to run public lotteries and validates the selection of winners in gaming competitions.
The agency is yet to develop regulations on how the newly introduced windfall tax will be implemented.
Kenya’s betting industry is dominated by casinos, SMS lotteries run by mobile phone service providers, sports betting, promotions by corporate firms and lotto firm Kenya Charity Sweepstakes.
Like Safaricom, promoters of betting competitions are expected to go slow on offering non-cash prizes such as mobile phones, apartments, plots, holidays and gift packs in favour of cash – for easy calculation and remittance of withholding tax.
If the legislation on windfall tax was in place last year when Safaricom ran a lottery dubbed ‘Tetemesha Na Safaricom’, the ultimate jackpot winner would have bagged Sh8 million in cash and paid KRA Sh500,000 to drive away with the pick-up valued at Sh2.5 million.
In the event winners are unable to afford the windfall tax, businesses face the challenge of deciding whether to gross up the tax or sell the item and pay the withholding tax to KRA and give the remaining 80 per cent of the value to the winner.
Take the example of Nation Media Group’s ‘Utahama Roundi Hii’ competition held last year where Daily Nation readers won three apartments at Next Gen, a mixed use development located off Mombasa Road.
There were three units up for grabs: a three bedroom house worth Sh22 million and two 2-bedroom houses worth Sh15 million and Sh16 million each.
Under the new law, the taxman would have demanded a share of the spoils where each winner would have had to part with Sh4.4 million, Sh3 million and Sh3.2 million respectively to KRA before they could claim the houses.
Safaricom has also raised questions on how KRA will determine the ‘fair market value’ of the item won for the purposes of calculating tax payable.
For example, Unilever is currently running a promotion named ‘Omo Wash and Fly to Dubai Promotion’ in which five winners will get an all-expenses paid trip to Dubai plus Sh100,000 shopping money.
Unilever has not disclosed the value of the trip to Dubai, making it difficult to compute how much tax the winner should pay. The take-home shopping cash for the winner would be Sh80,000 after deducting Sh20,000 to the taxman.
In Airtel Kenya’s ‘Vurumisha Mamili na Airtel’ held last year, some of the prizes in the raffle included Yamaha motorcycles whose worth was not given.
Other companies that have been giving away non-cash prizes in raffles include Family Bank, which ran ‘Kunacha Acre na Milli Tatu Pap!’ last year where the top prize was an acre of land and a cash prize of Sh3 million.
Shell is also running a competition where motorists stand to win a Pick Up - Shinda Ndai na Shell - when they refill their tanks with Sh3,000.
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Note: The results are not exact but very close to the actual.
