On a comparative approach so as to get to assess the effects of the digital service tax it is prudent to look into other countries. In France, a digital tax of three percent was introduced but levies on the revenue of large digital platform companies earned from advertising, online intermediation, or transmission of data. But the burden is lessened, whereby, the tax was introduced to raise alternative revenue to gradually reduce corporate tax rate to 25 percent in 2022. The EU legislation provides clarity on liability of services that are digital, so services provided over email, newspaper advertising, posters and TV, distance learning are exempted. An African country such as Senegal has enacted Senegalese Start-up Act. The Act offers tax breaks for any technology-oriented company that sets up in Senegal for the first three years, further; they have reduced the cost of registering technology companies. Senegal became the second African country to do this after Tunisia. In Kenya, the tax applies to almost all digital services, placing the country in a competitive disadvantage to attract digital investment. This will definitely make Kenya to tread a downward tread yet it has been a pacesetter according to many on the technology front.
It is worthy to note that by Kenya effecting the digital service act it will kill the already established online businesses for the 1.5% levies to be paid will be relatively herculean to an already overtaxed entrepreneur by the counties and the national government. The number of customers who have been using the platforms as well will be greatly affected. Others are of the view that this price distortion is not confined to the e-commerce space but the entire digital services liable. This will have a negative impact on the sustainable digital economy Kenya has been trying to build.
With all these taxes being implemented, Kenya appears to be on a path of reversing all the gains that have been made when it comes to being a leading technology hub in Africa. These new taxes are presenting a new challenge to existing and new technology companies mostly known as start-ups. Majority of these start-ups fall under the Small and Medium (SMEs) sized categories. SMEs are the backbone of the country’s economy constituting about 98% of Kenya’s business sector and employ about 14.5 million Kenyans.
SMEs in Kenya already pay several taxes including the 30% tax on profits for companies, , 3% turnover tax for any entity making above 500,000 shillings, they are required to charge VAT if the company has a turnover of above 5 million shillings annually and pay as you earn on behalf of their employees. With an already dire economic situation that had already started to show before the Covid-19 pandemic and has only gotten worse with the Covid-19 pandemic. Small and medium-sized companies in Kenya appear to be in turbulent waters. SMEs are front and centre when it comes to operating in the digital sphere. Even though the argument by the government is that these taxes target foreign digital entities that operate in Kenya, SMEs particularly those in the technology sphere appear to have been caught in this net.
The timing of the coming into effect of the digital service tax is a concern, especially to start-ups and small businesses. These SMEs are just from surviving from the effects of the Covid 19 pandemic, some hand loans to pat back to their lenders. The digital tax is another slap on their face. Does it show that the government cares for its people and businesses? One keen Kenyan was quick to note that we seem to have a ‘don’t-care’ tax policymakers, Treasury and Parliament who draft and pass tax law. According to the recent World Bank Economic Update, the economy condemned two million Kenyans to poverty with many other losing livelihoods.
Two things are certain in life: death and taxes. The former no one knows the time or place, but the latter can be predicted, and its effects mitigated early. In this instance, the solution clearly is not to kill them with taxes.