Tech Startups & Legacy Firms Are Feeling The Pinch In Tax-Hungry Kenya

By  |  July 21, 2023

As the Kenyan government fights for a bigger piece of the pie, increased taxes are putting pressure on companies operating in the digital economy, fuelling discontent that could spark upheavals.

Businesses are feeling the pinch of the various new taxes that have been imposed of late while fearing a further squeeze as additional taxes are on the horizon. Last month, the payments services startup Pesapal was slapped with a staggering USD 1.6 M tax bill following a dispute with the tax body that raised eyebrows and caused unease in the tech entrepreneurship scene.

A new law in Kenya that targets tech businesses has increased the digital service tax from 1.5 percent to 3 percent on the gross value of online transactions, causing distress among tech firms in Kenya.

Companies that sell items would furthermore pay an excise tax on top of the annual corporate tax, which is capped at 30 percent. In addition, Kenya’s new Finance Act raised the capital gains tax rate from 5 percent to 15 percent.

The tax on digital services, along with those on over-the-top services, mobile money transfers, and other e-commerce and mobile services, according to industry players who spoke to Business Daily, may cause their businesses to stall.

“Tax authorities in various countries are currently reviewing the appropriate treatment of e-commerce activities. Recently, several countries in Africa have imposed new, or increased existing, taxes on e-commerce and mobile services,” says Jumia, an e-commerce firm with a presence in Kenya.

Kenya levies a digital service tax on earnings or accruals resulting from the provision of services through an online marketplace.

In the fiscal year ending in June 2023, the Kenya Revenue Authority collected KES 5.33 B (~USD 37.5 M) in value-added and digital services tax, a 208 percent increase over the prior year. Given the growing value of its digital markets, there is plenty of room for bigger tax collections in Kenya.

Multichoice, a supplier of pay television services with operations in several nations, including Kenya and Nigeria, claims that additional taxes put it in danger of double taxation.

“Some countries are introducing new taxes such as the digital services tax in Kenya, which requires different laws and compliance burdens and potentially double taxation,” says Multichoice in the latest annual report.

“There are also numerous local and international tax policy changes being introduced, which further increase the risk of double taxation.”

Elsewhere, mobile money transfer taxes have been implemented in Uganda and the Ivory Coast. Industry players anticipate that more African nations may introduce new taxes on mobile and e-commerce services, increasing the present tax rate. On a similar note, Uganda recently enacted a new levy on international companies offering internet services like Netflix and Facebook.

E-book and movie sales, online dating, music, gaming, and subscription-based media, such as newspapers, periodicals, and digital content, are other services that now fall under the purview of Kenya’s taxman, as governments increasingly focus on bringing the tech economy into the tax net.

CORRECTION (July 25th, 2023; 10:31 WAT): The references to Wasoko in an earlier version of this article, citing an interview with Quartz Africa, have been removed as Wasoko has reiterated to WeeTracker that Wasoko’s headquarters remain in Kenya and the company has only set up an Innovation Hub in Zanzibar. Wasoko also maintains that despite what was stated in the Quartz Africa article, Daniel Yu, its CEO, never made any references to ballooning taxes in Kenya or the Finance Bill in the original interview, adding that Yu and Wasoko were misrepresented in the publication.

Featured Image Credits: Standard Media

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