Columnists

Rethink digital tax before rollout

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Ukur Yatani has proposed to introduce digital service tax on the value of transactions at the rate of 1.5 percent. FILE PHOTO | NMG

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Summary

  • A tax regime that approaches the job on the basis that taxes must be collected at all costs, regardless of the negative impact on the macro-economy, cannot claim to be pro-growth.

I think that the government should postpone the idea of a digital service tax (DST) it plans to start collecting beginning January 1, next year.

We are rushing into this headlong when even within OECD member countries, there is still no consensus around tax treatment of the digital economy.

Although a number of countries have recently begun to introduce new digital services taxes for a narrow group of companies we must not assume that what is applicable in a different context can always be successfully implemented here.

We need to reconsider introducing this tax until we have thoroughly thought through and conducted wide consultations with stakeholders on the likely implications for our aspiration to develop a sustainable digital economy.

As we all know, we have a blueprint that has set very high ambitions and aspirations about how we want to develop a sustainable digital economy.

We should comprehensively look at the impact on employment and especially on the unprecedented explosion and growth of tech-savvy youth who depend on online services and platforms for their daily hustle.

Have we figured and calculated how the proposed tax is likely to affect employment and incomes of Internet service providers and entities such as subscriptions-based media and web hosting services?

Jobs are likely to be lost in local agents of companies that provide cloud storage services, online data warehousing and automated help desk services who are bound to be rendered less competitive by the introduction of this tax.

I see a backlash from consumers and subscribers of online services. And, we run the risk of discouraging investment in this sector, especially of private equity and foreign direct investment into the country.

Then you have the problem of the capacity of the Kenya Revenue Authority (KRA) to enforce a DST.

When it comes to implementing complex taxes such as DST, the KRA is not famous for efficiency and enforcing high standards of tax compliance.

This is going to be a very slippery terrain for the KRA because the tax authority is in a position where it has no visibility of most digital transactions.

How do you punish non-resident Internet companies for non-compliance when you don’t see the transactions?

How do you punish non-compliant Internet companies who are non-resident but have users in Kenya?

Even in advanced markets with high tax compliance levels like the US, authorities are struggling with transactions taxes.

Taxes must be simple, easy to collect, and easy to enforce. Online services are complex because tax invoices are neither required nor generated. If you don’t have an invoice, what document will be the basis of the charge?

Let’s wait and see whether the KRA has what it takes to deal with these complexities and whether the revenues and tax yields will make economic sense.

The technical issues around the enforcement of the DST aside, we must remember this is the territory for the battle-hardened tech giants — the likes of Google, Amazon, and Microsoft — who have had famous fights even with the very efficient and giant tax authorities within their own jurisdictions in Europe and the US.

Whichever way you look at it, it’s going to be a slippery territory for the KRA.

The government has calculated that it will collect Sh2 billion in additional revenues from DST. Fair enough. It is only that I subscribe to the view that tax policy is not just a matter of collecting more money for the government.

A tax regime that approaches the job on the basis that taxes must be collected at all costs, regardless of the negative impact on the macro-economy, cannot claim to be pro-growth.

As a taxman, taxpayer morale is your most important asset. Taxes must be framed with the needs and convenience of the taxpayer in mind.

Unfair taxes inevitably lead to citizens resorting to avoidance.