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 has accelerated the paradigm shift, digitisation of international commerce was already picking momentum all over the world before the pandemic. It will only get bigger and more vibrant.
The evolution of the digital marketplace, as a subject, took centre-stage during the tax summit organised by Kenya Revenue Authority (KRA) in November this year. Participants at the two-day tax summit, who were drawn from various parts of the world, unanimously noted that there is 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 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 pandemic 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 DST, 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.
This tax 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 DST will apply include 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, DST will be a final tax and shall be administered by tax representatives to be appointed by KRA. On the other hand, for Kenyan residents, DST 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 DST. This dispels the fear that DST might choke local businesses operating 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 introduction of DST establishes a level playing ground for all business, hence promotes equity. 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 DST will therefore balance this equation and fairly spread tax burden.
More revenue
Apart from levelling the ground for businesses, DST will also expand the tax base to a significant extent. KRA projects to collect more than Sh5 billion in the first six months of implementation of this new tax head.
Stay informed. Subscribe to our newsletter
Tax base expansion is one of the most effective modern-day tax administration strategies of widening the tax net and generating more revenue.
Put differently, tax base expansion is a sure way of raising additional revenue without overburdening taxpayers already in the tax bracket.
Implementation of DST will also ensure those non-resident enterprises which dominate the digital marketplace plough back the income they generate within Kenya. In other words, DST 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, 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 Simiyu is the Commissioner for Domestic Taxes Department at KRA