High taxes dampen Kenya’s Silicon Savannah dream

The Kenyan tech scene is experiencing an exponential boom.  

Photo credit: Shutterstock

When Kenyan authorities mooted a scheme to position the country as a first among equals in technological inventions more than a decade and a half ago and coined the phrase ‘Silicon Savannah’, the grand plan offered the promise of a new dawn that could have highly impactful economic upshots.

If all went according to plan, the resulting innovation ecosystem was touted to mirror America’s Silicon Valley or Bangalore which is the centre of India’s high-tech industry.

A few years into the implementation of the President Kibaki-era blueprint, Kenya was billed to be conquering the global tech space owing to the rapid developments that sprouted, increasingly cementing its place as a major tech research and incubation hub.

In recent times, however, industry analysts and opinion shapers have sounded alarm over punitive State policies, majorly pronounced on the taxation front, that they say could potentially negate the years-long gains made thus far.

In the recently published Finance Bill 2024, the tech sector faces a serious hit as a number of products and services are lined up for higher taxes. 

Among the glaring proposals include the introduction of a 1.5 percent Digital Service Tax (DST) on local platforms offering online jobs, rental, food delivery and ride-hailing services in an amendment poised to also affect platforms owned by foreign firms but with a local presence.

For non-resident providers, the DST will be replaced with Significant Economic Presence (SEP) Tax that will be charged at the rate of 30 percent of the taxable profit, subject to regulations that the Treasury Cabinet Secretary may issue.

In the fintech space, the bill proposes an increase of excise taxes on the cost of mobile money transfers via platforms such as M-Pesa and Airtel Money, as well as on airtime and data from the current 15 percent to 20 percent. This comes at a time when high data costs have been flagged as a major hindrance to the growth of the local digital market.

Other proposed amendments include an end to the tax exemption to individuals registered under the government-backed Ajira Digital Programme, a data protection waiver to allow the Kenya Revenue Authority access sensitive personal data, as well as the raising of excise tax on betting stakes to 20 percent from 12.5 percent in addition to a similar rate charged as withholding tax on every winning bet.

Experts who have weighed into the debate have called for a more harmonised shift in the taxation regime, arguing that radical changes could prove counter-productive.

“Too much surveillance and taxation may hinder innovation in the tech sector thereby discouraging start-ups and small businesses. The policies could also potentially disadvantage Kenyan tech firms compared to those in countries with more favourable regulations thus giving them a competitive disadvantage,” opines Stephen Waweru, Senior Manager of tax services at KPMG.

Mr Waweru observes that an ideal proposal would be one that aims to strike a balance between revenue generation for the government and fostering growth and innovation within the tech industry.

“The government should instead provide incentives such as tax credits or temporary tax breaks to stimulate investment in innovation and technology advancement. This could, in turn, encourage the development of new products, services and solutions that contribute to economic expansion,” he states.

His views are shared by associate director at Ernst & Young (EY) Robert Maina who says that heavy taxation will suffocate the emergence and growth of small players in the sector.

“While it is inevitable to have a tax that will capture digital players, there should be a threshold to ensure that small players are given room to grow before being brought into the ambit of taxation,” asserts Mr Maina.

The pundits concur that if the bill sails through without alterations, the immediate effect will be that non-resident operators may choose to structure their costs in a manner that will transfer the burden to the final consumers in the local market, while others could opt to close shop and venture into economies with friendlier policies.

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