Digital tax will make online shopping costly

The digital economy has gained prominence globally as a driver of innovation and competitiveness. This growth has been fuelled by the Covid-19 restrictions that are transforming the traditional ways of conducting business to online interactions.

As digital technologies become the cornerstone of our daily activities; governments, individuals and businesses must move in sync.

While the fruits of the digital economy are insurmountable, governments and international organisations such as the Organisation for Economic Co-operation and Development are grappling with its taxation. Kenya unilaterally introduced income tax and Value Added Tax (VAT) on digital services effective January 2021 and March 2021 respectively.

This was meant to expand the tax base, ensure equity between digital and non-digital operators and ensure non-resident persons contribute to the national kitty.

Digital Service Tax (DST) is charged at 1.5 per cent on income derived from or accrued in Kenya through electronic means such as a website or mobile application. It applies to income earned by individuals and businesses including non-residents, from users in Kenya.

A person delivering a service electronically including consultancy through a digital platform to a user in Kenya at a fee will be required to pay DST. Likewise, a person earning commission from the use of a website or other electronic application, by a user in Kenya is required to pay DST.

Take an example of a user in Kenya, downloading and subscribing to watch a favourite programme in Viusasa App or using a website to book a hotel room or make an advertisement, the owners of the app and the website will pay DST on the commission earned.

DST applies to all income earned digitally via interaction between buyers and sellers in Kenya or outside through electronic means. Financial institutions registered in Kenya and government institutions are exempted from DST.

VAT is however charged on digital marketplace supplies (DMS) made to recipients in Kenya by a supplier outside Kenya.

Previously, VAT was charged on imported electronic services under the reverse charge mechanism, hence it was the importer’s responsibility to account for VAT on the imported services.

With the introduction of VAT on digital marketplace supplies, accounting for VAT is also the responsibility of the non-resident.

VAT applies to non-resident suppliers on both electronically supplied services to recipients in Kenya and commission earned from the use of electronic platforms by users in Kenya.

Commission earned 

For instance, the commission earned by the non-resident digital platform providers in the transport sector when you book a cab online will be subject to VAT at the standard rate of 16 per cent.

A non-resident who is liable for VAT on DMS is likely liable for DST. Both VAT and DST are payable monthly by the 20th day following the month of supply.

A qualifying non-resident person should register as a taxpayer through KRA’s i-tax platform or appoint a tax representative.

DST paid by a resident person is deductible against the tax liability payable at the end of the year.

Digital income earned by a non-resident person is not taxed further in Kenya other than DST.

Non-residents are not entitled to claim input VAT. The law, like any tax collection, poses a challenge and KRA is certainly banking on taxpayers’ goodwill. Agency collection by KRA through banks may be challenging as payment would comprise gross receipts that may not qualify for DST or VAT.

For instance, a payment made by a client of a hotel through a website would comprise both the hotel room price and the commission.

DST is applicable on the commission. However, withholding DST on the full amount for non-complying suppliers may increase the chances of compliance. There is no qualification threshold for digital service tax. Accounting for DST monthly is an additional administrative cost to small players.

The cost of online services will likely increase by the VAT amount. However, proponents of the digital tax say this is a fair playground with other non-digital service providers that charge VAT.

How will DST be impacted by the double tax agreement treaties in place between Kenya and other countries? How will it affect the trading partnership with other countries? How will it contribute to or impact the growing digital economy in Kenya, Vision 2030 and the Konza City digital hub?

It is advisable to comply since the cost of non-compliance is higher than compliance. It’s a matter of time before digital tax is embraced by all countries. Hopefully, international tax bodies will soon issue a multilateral framework that will ensure fair and equal taxation that will avoid double taxation.

KRA projects that the digital tax will boost its revenue targets and also widens the tax base.

Many non-resident companies have already voluntarily complied and KRA is earning this extra revenue from “new taxpayers”.

- The writer is a senior tax consultant at EY. The views expressed herein are not necessarily those of EY