Stiff direct taxes on betting houses not the solution

Diminished returns would make the sport less attractive. FILE PHOTO | NMG
Diminished returns would make the sport less attractive. FILE PHOTO | NMG 

In the 2017/2018 Budget Statement, the National Treasury Cabinet Secretary gave the rationale behind increasing taxes on betting houses as eradicating irresponsible betting in the country. However, an evaluation of this policy proves nothing short of abject futility.

Statistics from one of the leading betting houses in Kenya show that the move has had zero impact on the betting activities in Kenya.

Besides generation of revenue, taxation is often used as a tool for social and economic control.

Consumption taxes such as excise duty may be used to control consumption of goods and services perceived as harmful to the society. For instance, in 2015, the government increased excise duty on cigarettes and alcohol in a bid to reduce their consumption.

For tax to be an effective tool for consumption control, the ultimate financial burden of the tax should be borne by the final consumer.

There are two main classification of taxes: direct taxes and indirect taxes. The financial burden in direct taxes falls on the person to whom the tax is imposed.

This means that the burden cannot be directly passed to the end consumer. Examples of direct taxes include employment tax, known as pay as you earn (PAYE), corporation tax and betting tax.

On the other hand, indirect taxes are levied on the suppliers but the pecuniary burden is passed on to the final consumer as a price component.

Therefore, indirect taxes increase the prices of supplies making them more expensive, thus discouraging their consumption.

Examples of indirect taxes include Value Added Tax (VAT) and excise duty. Indirect taxes are more effective in consumption control since their pecuniary burden can be easily passed along the supply chain up to the end consumer.

A proper consumption control policy should be informed by the fact that consumers react only to changes which affect pricing, quality or quantity of goods and services.

This assertion is premised on the basic rules of demand and supply which provide that, inter alia; increase in prices of goods and services reduces their demand and ultimately consumption.

That said, betting tax and corporation tax are both direct taxes levied on the revenues and profits of betting houses respectively.

Their imposition does not affect the winnings of the punters (players). Therefore, their impact is inconsequential to the punters as it does not affect their craving for betting.

It is the high time the government rethinks its approach towards regulation of betting.

Besides imposition of hefty taxes, there are other pragmatic and effective approaches which can be adopted such as tightening the betting regulatory framework and ensuring better enforcement.

However, should the government insist on using tax as a tool for controlling irresponsible gambling, due to the obvious reasons of revenue generation, then a result targeted approach should be employed to ensure that the players bear the ultimate tax burden.

This can be achieved through imposing substantial taxes on the actual winnings of the players rather than the betting companies themselves. Diminished returns would make the sport less attractive.

Samuel Kioko is Senior Tax Associate at KN Law LLP.