Globalisation is driven by the growth of international trade and the advancement of modern information communication technology, which is leading to transformation from the conventional brick and mortar business model to online transactions.
Although the Covid-19 pandemic has accelerated the paradigm shift, digitisation of global commerce was already picking momentum. It will only get bigger and more vibrant.
The evolution of the digital market place, as a subject, took centre stage during the tax summit organised by the Kenya Revenue Authority (KRA) last November.
Participants at the two-day tax summit drawn from various parts of the world, unanimously noted that there is a need for the tax administrations to adjust to this reality by identifying and implementing a modern tax collection mechanism that aligns to online business models.
A few years ago, digitisation experts and researchers had predicted that by 2020, the digital marketplace would account for more than 40 per cent of the online retail market. The statistics could be higher given the pressure the Covid-19 put on global business to survive. At any rate, this is a promising platform for revenue generation, and realignment of tax collection mechanisms is of urgent necessity.
The introduction of the digital service tax (DST) in January 2021 is a remarkable step for Kenya in this direction. The tax, which was introduced through the Finance Act 2020, will be charged at a considerably low rate of 1.5 per cent of the gross transaction value. It will be payable by persons, both residents and non-residents, who derive or earn income in Kenya through the provision of services on the digital market space.
Some of the digital services to which the tax applies include the provision of digital marketplaces that connect buyers and sellers, streaming and downloading of digital content such as music, media-based subscriptions like e-journals, electronic data management and online ticketing, among others.
For non-residents, digital service tax will be a final tax and shall be administered by representatives to be appointed by KRA. For Kenyan residents, it will be treated as advance tax to be offset against taxes payable in the course of the financial year.
Besides, income sources that are already subject to withholding taxes are exempt from the digital service tax. This dispels the fear that it might choke local businesses in the digital marketplace and start-ups contemplating an investment in online shopping. It further rules out cases of double taxation for local businesses.
The tax establishes a level playing ground for all business, promoting equity. A lack of an ideal taxation mechanism has for a long time seen most businesses in the digital marketplace operate without remitting their fair share of the revenue.
This explains the failure of the vibrant growth of business activity in the digital market to impress the revenue coffers.
The result has been an undue advantage for such businesses over tax compliant businesses operating under the conventional business model. Introduction of digital tax service will, therefore, balance this equation and fairly spread the burden.
Apart from levelling the ground for businesses, it will also expand the tax-base to a significant extent. The KRA projects to collect more than Sh5 billion in the first six months of implementation of this new tax head.
Tax-base expansion is one of the most effective modern-day tax administration strategies of widening the net and generating more revenue. Put differently, it is a sure way of raising additional revenues without burdening taxpayers.
The DST will also ensure non-resident enterprises, which dominate the digital marketplace plough back the income they generate within Kenya. In other words, it provides an avenue for multinationals to contribute to the growth of the country where they derive their income.
This will strengthen the moral business case for international commerce as practised in Kenya.
With the countdown to the implementation of DST underway, the KRA has put in place the requisite measures, ranging from stakeholder engagements to system enhancements, to ensure effective implementation. Measures are also in place to facilitate taxpayers who will require support, whether technical or otherwise.
Ms Simuyu is the Commissioner for Domestic Taxes Department at the Kenya Revenue Authority