- Adaptation to new trends for businesses can only mean one thing for tax administrations: implementation of tax administration measures that best suit the digital economy environment.
- Taxation of transactions taking place over the digital space has been the bane of many tax administrations across the world.
- The higher the uptake of e-commerce, the higher the need for tax administrators to conceptualise the best tax administration mechanisms that suit players in the digital market place.
Businesses have since time immemorial undergone a myriad of revolutions in a bid to keep up with the ever changing trends. However, there has been no bigger revolution witnessed in the world of business than the one that proliferation of information communication technology has sparked.
Virtually, every business enterprise is now leveraging the underlying potential of the Internet in order to keep afloat. This is what US business magnate and software developer, Bill Gates seems to have foreseen a while back when he said that “if your business is not on the Internet, then your business will be out of business”.
Reports note that increased penetration of mobile telephony coupled with high uptake of Internet connectivity are some of the factors pivoting the robust establishment of the digital economy. The Communications Authority of Kenya (CA) reported a 88.1 percent mobile penetration in Kenya with a subscription of 37.8 million in 2015/2016.
The advent of Covid-19 pandemic has been even a tougher test for most businesses that are yet to embrace Internet enabled technology. Most of the safety guidelines issued by the authorities have taken their toll on the operations of a good number of businesses. The handiest contingency measure for businesses has therefore been shifting their operations online for them to keep running.
Adaptation to new trends for businesses can only mean one thing for tax administrations: implementation of tax administration measures that best suit the digital economy environment. Taxation of transactions taking place over the digital space has been the bane of many tax administrations across the world. The higher the uptake of e-commerce, the higher the need for tax administrators to conceptualise the best tax administration mechanisms that suit players in the digital market place.
The Finance Act 2020 has included income from the digital market place among the taxable incomes in Kenya. These incomes will now be subject to Digital Services Tax (DST), which is a revenue collection tool for all transactions taking place on the digital market place. The new tax is charged at the rate of 1.5 percent of the gross transactions. DST is a timely measure as it comes at a time when the uptake of ecommerce is on a steady rise in the country. As mentioned earlier, it is time for tax administrators to align tax administration to the changing business trends.
The debate on the merit and modalities for taxation of transactions taking place in the digital market place has been on for a while. In a 2001 interview with the Organisation for Economic Development and Cooperation’s (OECD) Observer, Simon Woodside of OECD’s Fiscal Affairs noted that there is no rational case of granting more favourable tax treatment to e-commerce than conventional trade. He argued that the growth of e-commerce means an expanding hole in the revenue base if tax administration frameworks are not put in place.
Let’s bear in mind that conventional trade is fast transforming itself into the digital space thus the tax base is simply shifting
Economic think-tanks attribute the exponential growth of the digital market place to the many transactions taking place on a daily base whose worth is to the tune of billions of dollars.
In an overview of the Kenyan digital market, Frost and Sullivan predicts a growth of up to $5.15 billion in this space by 2022. This underscores the tremendous potential growth in the digital market place. It would therefore be only fair for Kenya to introduce a taxation framework for the digital market place so that the players can also contribute to the national revenue kitty just like the conventional businesses. Fairness is a key tax administration principle which ensures there is a level playground for all.
In addition, implementation of the digital services tax is a revenue base expansion initiative which will go a long way in ensuring that the government mobilises more revenue without necessarily overburdening taxpayers already in the tax net. Tax base expansion framework is one of the best practices tax administrators are adopting globally for enhanced revenue mobilisation.
There have been fears that implementation of the proposed tax would amount to double taxation for companies domiciled abroad but transacting locally given that they already pay taxes at their home countries.
According to principles of taxation, a tax is levied at source or where the income is derived. In this case, the tax that the Kenyan government will focus on is the revenue derived or sourced locally. Therefore, a case of double taxation will be out of the question.
Mwinzi is a lecturer at KCA University