Digital tax will hurt firms

The move by global tech giants to increase the cost of their services in Kenya following the enactment of the 16 per cent value added tax (VAT) in April last year will affect many start-ups in the country.

Apple, Microsoft and LinkedIn have started charging their users the VAT on their products. Microsoft has increased the subscription cost of its services such as Windows apps, OneDrive, Outlook, Microsoft Teams, OneNote and Skype — a move that will increase the cost of doing business.

The government moved to tax the fast-growing digital economy as many activities, including shopping, meetings, learning and trading, have shifted online. Critics have, however, argued that the move — in addition to the digital services tax (DST) — will inhibit the sector’s growth, especially small and medium-sized enterprises (SMEs).

They argue that the opportunity cost far outweighs the benefits. Thus, while it’s understandable that the government has targeted taxation of the digital economy to support the budget and reduce reliance on borrowing, they have to be reasonable to support businesses.

Kenya’s information and communication technology (ICT) sector has been growing at a steady rate. It grew 6.9 per cent from Sh529.8 billion in 2020 to Sh566.3 billion in 2021, but high taxation risks rolling back the gains.

However, the government can, for instance, reach a win-win situation for both the Kenya Revenue Authority and businesses by halving the VAT tax to 8 per cent, which would allow the agency to collect a reasonable amount of funds from the sector while also giving companies some breathing space.

This has been done before. A key product in setting the cost of living, the government halved VAT on fuel to 8 per cent from 16 per cent, which has ensured that the essential product is affordable.