E-commerce firms have voiced concerns over the Treasury's proposal to slap local traders with a five percent withholding tax on the value of goods they sell online, warning that the move will reverse gains made in online trading.
The Laws (Amendment) Bill, 2024 also proposes to introduce a 20 percent withholding tax on goods sold online by a foreign trader, targeting e-commerce giants such as Amazon and Alibaba that don't have a local presence.
Led by Jumia, a New York-listed e-commerce firm, the companies want the clause introducing the tax deleted from the Bill, arguing that it is counterproductive.
Many local and foreign vendors currently sell their products through popular e-commerce platforms such as Jumia and Kilimall. Should the proposals go through, these e-commerce platforms will be required to withhold either five or 20 percent of the money to be paid to the vendors.
The Bill proposes to amend the Income Tax Act to require owners or operators of digital marketplaces/platform to withhold tax at a rate of five percent and 20 percent on payments to made to residents and non-residents respectively.
Kenya has seen a boom in online commerce with firms such as Jumia, Glovo and Uber Eats rapidly operating in major towns as more Kenyans seek the convenience of making orders online and having them delivered to their homes or offices.
“Withholding tax will drive vendors from e-commerce platforms to physical shops/ social media where their sales won't be subject to the tax,” Vinod Goel, Jumia East Africa CEO, told the National Assembly on Wednesday last week.
‘Mass exits’
“These mass exits from platforms will lead to unintended consequences and be counterproductive to revenue collection efforts from the proposed withholding tax.”
There are also concerns that the new tax, if adopted, will trigger additional costs for the end user as the e-commerce firms pass on the impact to consumers.
Jumia adds that the new tax will further strain the cash flows of businesses and add to their tax administration costs, as it will be on top of the 1.5 percent turnover tax.
Online shopping has also become a major source of employment, with many young Kenyans setting up online shops, while others earn a living by making physical deliveries.
The e-commerce firms mainly act as intermediary platforms and do not own the goods and services. They receive a commission calculated as a percentage of the selling price.
Jumia also described the amendment as discriminatory, as similar items sold offline are not subject to the same tax, giving brick-and mortar retailers an undue advantage over their online competitors.
“Withholding tax will erode the formalised tax base as it will lead to mass exits to hard-to-tax physical stores/social media where withholding tax obligation is not imposed. The withholding tax will slow down the government’s efforts of expanding the tax base,” Mr Goel added.
There are also concerns that non-resident owners of platforms such as US-based Amazon and China’s Alibaba will be required to register for tax purposes in Kenya, which will require regulation, Oraro and Company Advocates said in a commentary.
“The problem with this proposal is that it implies a situation where non-residents may be deemed to have made taxable income from Kenya even when dealing with other non-residents and this requires clarification,” the law firm said.
