November 27, 2020 - 5 minutes read

Demystifying Digital Service Tax

By The Vellum Team

On 27th November, 2020, the Kenya Revenue Authority (KRA) hosted an online sensitization forum on Digital Service Tax (DST). In his presentation, Mr. Nickson Omondi provided highlights of the policy and legislative changes that have been effected in order to operationalise DST which comes into effect in January, 2021. Digital Service Tax is a tax on income derived from or accrued in Kenya by a person from provision of services through a digital marketplace. Digital marketplace is then defined as an online platform that enables the direct intervention between buyers and sellers.

It is notable that DST is chargeable under Section 3 of the Income Tax Act a rate of 1.5% of the gross transaction value. Furthermore, DST will be on profit and not on value added like VAT. It is thus not shouldered by the final consumer. However, the issue of pricing is a private affair based on other economic business and conditions not addressed by the tax rules. The target audience for DST is both resident and non-residents. For residents, the DST is not a final tax and is pegged on an individual by the virtual of being present in Kenya or have a permanent home in Kenya. In the laws of Kenya or its management and control is being exercised from Kenya. It is however notable that DST for non-residents is final.

In addition, it is important to note that the administration and collection of DST will be administered by a dedicated team that will monitor compliance with DST law and regulations. The collections will however be based through self-assessment, where taxpayers will register, file and pay the requisite taxes. The KRA iTax system has also been enhanced to cater for DST. Among the key questions asked were in relation to enforceability and the impact that this might have on loss making companies. Additionally, there were concerns expressed over the impact, if at all, that this type of tax would have on foreign Government relations specifically with the US Government. In this regard specifically, KRA assured participants that wide stakeholder engagements had been held including with the American Chamber of Commerce (AmCham) and their views had been factored in the tax model for DST.

For more information on the guiding policies and legislation, please see https://www.kra.go.ke/images/publications/Revised-Draft-DigitalService-Tax-Regulations-2020—07-08-2020.pdf

Meanwhile, something to keep an eye out for is additional Tax Laws that will be coming up in January 2021.

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