Experts warn new excise tax may breed underground online betting

Analysts say that the new tax may kill the formal betting industry in Kenya

Tax experts have faulted Treasury’s proposal to charge excise duty on stakes in a bet. They warn of a possible spike in unregulated online betting and possible death of the formal betting industry in Kenya.

They reckon that the proposed 10 percent excise tax on stakes would push the majority of consumers to online, unregulated betting platforms where the government has no control.

This would hurt betting companies along with the taxman in foregone revenues. It would also undermine the government’s efforts to regulate the industry, they say.

The Finance Bill 2019, whose passage will bring into force a raft of budgetary tax changes, proposes a raise of the sin tax on beer, cigarettes and gambling.

Analysts from business advisory firm KPMG noted that the new tax when in place might have a huge toll on the industry and might finally see some of the firms pushed to closure. “The betting industry has been painted as the poster child for sin tax. The CS has proposed to introduce a 10 per cent excise tax on the amount staked to cash in on the success of the betting industry,” said KPMG in a post-budget brief.

“The new tax adds to the heavy tax burden of 15 per cent betting tax, 30 per cent corporation tax and 20 per cent withholding tax on winnings that the industry is under, and could be the straw that finally breaks the camel’s back.”

Treasury, according to law firm Bowmans, appears to try to cure a social problem by making it expensive but noted that fiscal policy is not adequate to address social issues. “Excise duty to be levied on bets staked at 10 percent (is) another attack on the betting industry. The introduction of this tax may not be sufficient if the intention is to reduce betting by the less privileged in society. Perhaps introducing a minimum bet size may be better coupled with civic education programmes would achieve more,” said Bowmans Law.

Betting companies like SportPesa have warned that instead of increasing tax revenue, proceeds realised from the newly imposed tax will fall far short of projections.

The proposals are part of a “growing consensus that legal sports betting may not bring the tax revenue windfall that Treasury forecasters are predicting, but may instead kill the formal betting industry in Kenya.

Withholding tax

“With excise tax, a company cannot absorb it. There is little to do but pass it to consumers. There is also a likelihood that people will be betting with companies that operate offshore. There are a number of these companies that do not have offices here or pay taxes to the government but Kenyans are betting on their platforms, winning and get their winnings sent to their mobile phone lines or other payment platforms. Betting will continue thriving but taxes will be going to other countries,” said SportPesa in response to our queries.

It is not the only taxation issue that the industry is contesting. Treasury last year slapped winners of betting money with a 20 per cent withholding tax. The two sides, however, cannot seem to agree on what proportion of the money to tax.

Treasury believes that the total amount to the gamers, including the amount they had bet, should be subjected to a 20 per cent withholding tax while the industry says KRA should only tax the winnings. In its definition of winnings in the Finance Act 2018, Treasury noted that “winnings” include any kind and a reference to the amount or the payment of winnings shall be construed accordingly”. 

“Betting companies are required to withhold winnings at a rate of 20 per cent… this means that if you place a bet and win Sh50,000 you will receive Sh40,000. The balance of Sh10,000 is withheld by the betting company and remitted to KRA,” said KRA in a statement.

“KRA taxes the winnings of punters (people who place bets) when they wage successful bets. It is important to note that placing of bets is a form of entertainment and does not lead to generation of income because it is a consumption tax.”

Sector players, however, are of the view that this might see their customers incur a higher tax burden that would wipe out their winnings as well as eat into the amount they had put in the bet.

“This simply means that the player has no reason to play. He would rather play on sites that don’t charge tax, or simply go to underground betting shops where they can be paid the full amount,” said SportPesa in a letter to KRA.

“We believe that there is a difference in our interpretation of winnings … the current interpretation that is used by the authority has the effect of taxing a player’s stake (investment) and therefore making our business completely unviable and will surely lead to business closure.”