Taxing the digital economy: Indepth look at DST, loopholes and how to get it right

  • 9 Dec 2022
  • 7 Mins Read
  • 〜 by Susan Njeri

The global economy has gone digital. This has increased the issue of tax avoidance and tax equity and sparked an increase in digital taxes worldwide, therefore increasing the number of challenges to trade law. Kenya is one of the nations that have rolled out a digital service tax.

A number of businesses have scaled up their presence in digital platforms where they now routinely conduct and complete transactions. Such includes Kenyans who connect to digital sources of news and information every day, search for information on Google, Facebook, Twitter including those who trend (and their followers) and also on WhatsApp. The new boardroom has migrated online through platforms such as Skype, Google Meet, webinars, Zoom just to name a few. Many Kenyans are on LinkedIn, and with the lockdown brought about by the Covid-19 outbreak, schoolgoing children on extended holidays, led to a surge in Netflix subscription as well as other media streaming sites. The traditional taxi has been overtaken by Uber trips, Wasili, Taxify etc. 

In recognition of this shift, many jurisdictions around the world have in the recent past enacted tax legislation aimed at taxing the digital economy, and Kenya has not been an exception. In 2020, Kenya introduced two types of taxes targeted at the digital economy, namely; Digital Service Tax (DST) and Value Added Tax on Digital Marketplace Supply (VAT-DMPS).

Kenya amended its tax laws; through the Finance act of 2019 and 2020 to net digital businesses. The laws addressed the gaps in VAT law and the Income Tax  Act with respect to taxation of the digital economy. In these laws the digital service to include the supply of downloadable digital content, subscription-based media, software programmes, supplies on online marketplaces, digital media content, data management services, and search engine services, among others, and include any other supplies as determined by the Commissioner hence covering digital space in totality and leaving everything to the discretion of the Commissioner Domestic Taxes.

The DST is capped at 1.5% of gross revenue transaction value and is applied exclusively to non-resident firms or organisations without a presence in Kenya physically. This came into effect from January 1, 2021.

Non-residents who do not have a permanent establishment in Kenya have two methods of accounting for the digital taxes. One, they can opt to appoint a tax representative in Kenya. The tax representative will be a Kenyan entity that will be responsible for filing the returns, making payments, and maintenance of tax records on behalf of the non-resident. Alternatively, the non-resident could rely on an agent appointed by the Kenya Revenue Authority (KRA) on their behalf who is likely in most instances to be a payment service aggregator.

The following are the parameters used to determine whether a user is located in Kenya:

  • Payment of the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya.
  • The user accesses the digital interface from a terminal located in Kenya.
  • The supplies or digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya.
  • The user has a business, residential or billing address in Kenya.

According to the Finance Act of 2021, section 3(b), DST applies to digital marketplaces, which means an online or electronic platform which enables users to sell or provide services, goods or other property to other users.

Entities that offer in-scope digital services to Kenyan consumers are liable to the payment of DST and/or VAT-DMPS. Some of the services qualifying for DST and/or VAT-DMPS (Both the DST and the VAT on digital marketplace regulations are aimed at giving Kenya the right to tax income earned by businesses without a physical presence in Kenya but which derive income from Kenya) include, among others, digital marketplaces that act as platforms where buyers and sellers interact e.g. e-commerce companies like Jumia, Masoko (by Safaricom), Jiji and so many others.

The intent of the taxman is to widen the tax base. There has however been a disconnect between the tax agency and the intended tax payer (digital service providers) where there is no clarity on who exactly is to foot this bill. For instance, content creators have been crying foul that they are already overtaxed by paying VAT among other statutory taxes, and are still required to now part with DST. One major hindrance is the lack of public awareness. The layman’s interpretation has been that these new taxes were to target Kenyans seeking a living from social media platforms such as YouTube channels, Tiktok, and other similar platforms. There is a need for proper sensitization of the public for effective revenue collection.

The scope of taxable items under DST are as follows:

  • Downloadable digital content including downloadable mobile applications, e-books and films;
  • Over-the-top services including streaming television shows, films, music, podcasts and any form of digital content;
  • Sale of, licensing of, or any other form of monetizing data collected about Kenyan users which has been generated from the users’ activities on a digital marketplace; 
  • Subscription-based media including news, magazines and journals;
  • Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
  • Electronic booking or electronic ticketing services including the online sale of tickets; 
  • Provision of search engine and automated help desk services including supply of customised search engine services; 2252 Kenya Subsidiary Legislation, 2020; 
  • Online distance training through pre-recorded media or e-learning including online courses and training; and
  • Any other service provided through a digital marketplace.

How DST is collected

On or before the 20th day of the month after the digital service was offered, digital service providers participating in Kenya’s digital marketplace must file a DST return and pay the tax owed.

DST exemptions

The following services are exempted from paying DST;

  1. Section 9(2) of the Income Tax exempts the transmission of messages i.e communications providers such as Mobile Network Operators (MNO) or Internet Service Providers (ISP) from paying the DST. 


  • Sales promotion, marketing, and advertising services are excluded from paying DST in accordance with section 35 of the Income Tax Act. This is due to the fact that advertising is already subject to a withholding tax hence  online advertising is exempt from the DST. The purpose of a withholding tax is to widen the tax base and ensure that income is taxed that the tax authorities would not normally be aware of. For example, a firm purchasing advertising space on Facebook would be subject to WHT because Meta is a non-resident company. The Withholding tax(WHT) for marketing and advertising services is 20%. The WHT is withheld by the Kenyan firm and remitted to the KRA every month.

DST demerits

  1. It’s conceivable that the DST will normally lead to duplicate or excessive taxation since there are no double taxation agreements in effect with the nations where the headquarters of digital enterprises are located (such as the Netherlands and the USA). This therefore means that DST could be paid in Kenya and in the same service be taxed in another country.


  1. More likely than not, compliance expenses will outweigh revenues from DST. This is because  KRA mandates that non-resident businesses pay the DST through a local tax representative. This implies that a non-resident corporation must appoint a proxy to register for the DST instead of doing it directly, therefore making DST costly in terms of compliance.  This could discourage some of these platforms from setting up shop and thus denying the taxman an extra revenue source.
  2. The ripple effect of the DST in the long run could actually work against KRAs main intention of collecting more revenue. Digital Services Providers who can, will actually transfer the cost to their consumers to cushion themselves and keep their profits. This will in turn make it costly for clients earning from these digital platforms to manage operating costs. The result is a reduced clientele (only those who can afford). A majority of users are MSMEs (Middle & Small Medium Enterprises) whose profit margins may be significantly affected.

Challenge with Enforcement of DST

From OECD remarks, the DST taxing jurisdiction may encounter difficulties in auditing and verifying the accuracy of the returns filed and payments made by non-residents. This majorly is contributed by the fact that KRA has no access to non-resident companies’ financial statements regarding the revenues from Kenya. To be able to track and confirm DST refunds, KRA would need to put in place mechanisms that would allow each of these transactions to be cross-referenced.

Proposal to Enhance Compliance with DST

  1. Imposition of DST in Kenya needs to take into account provisions of cross border protocols and existing Double Tax Treaties. They pose a risk of triggering trade wars with business partners which will endanger outbound cross border trade and erode the gains made over the years in relation to ease of doing business in Kenya.


Special feature:  Internet Governance Forum 2022: Highlights and takeaways from the 17th session

All matters concerning the internet were discussed at the 17th Internet Governance Forum (IGF) held in Ethiopia last week. Wit h a thematic focus based off the Sustainable Development Goals (SDGs) central framework of ‘Leave No One Behind’, the IGF situated itself around the aspect of connecting everyone and at the same time safeguarding human rights. This first theme then spewed forth other themes of avoiding internet fragmentation, data governance and privacy, security issues and working with advanced technologies such as AI.

An attempt was made to view things from various lenses and activities were organised in various tracks such as the High-level leaders panel, the youth track, the parliamentary track etc

Some of the highlights include a policy shift to address cross border digital policies in the next two years. This was undertaken through the launch of the Internet & Jurisdiction African Union Report which highlights the challenges experienced in this area and calls for a multistakeholder approach in tackling them as a way to avoid internet fragmentation. The internet traverses’ borders. Without coherent policies, laws and regulations, there appear cracks that are harmful to societies affecting their human rights and their access to the internet and overall digital rights.

Digital rights were also addressed comprehensively. The ways in which digital discourse allows for access to information and at the same time protects the rights and privacy of participants while incorporating issues of social justice was at the core of this discussion. Inconsistency in the application of standards to digital rights and in the defense of those rights needs to be addressed in order to tackle internet shutdowns, censorship, online exploitation and datafication. This in turn hinders access to important information necessary to protect the democratic process, defend sovereignty or even lives.

Cybersecurity and data protection issues were also on the menu. Trustworthy access to the internet that allows for the sharing of data sensitive information is the foundation for the interactions that occur on the world wide web.  Again, collaboration and cooperation is considered important to tackle online fraud and financial fraud. Many financial institutions and also individuals are affected when they transact online and without a framework for tackling this problems, an information society cannot advance well.

Continental goals were discussed at the African Union Open Forum. Malawi was the host country this year at the IGF and took a lead in discussing African youth, digital transformation and digital capacity building through the establishment of the African school of Internet governance as key initiatives that can transform the content and lead to more inclusion and better use of the internet. Policy and regulatory goals for the continent that can drive more  

All in all, this IGF is a step towards a common technological future particularly on the African continent and paves the way for the discussions that will follow at the UN Summit of the Future slated for 2024 which will discuss the Digital Global Compact. The Digital Global Compact is viewed as a vehicle to drive a common purpose in technological matters.