DIGITAL ECONOMY

Revisiting the Digital Service Tax Regime

How the digital service tax works

In Summary

•There is an unwavering push to capture incomes and activities conducted within the digital space within the tax net

•Kenyan resident taxpayers have now been exempted from the ambit of digital service tax

Following tremendous strides in the digital services industry, fuelled by rapid technological advancements together with the adoption of the same in day to day life, it is no surprise that the digital economy has attracted the attention of revenue authorities world over.

Indeed, from a global standpoint, there is an unwavering push to capture incomes and activities conducted within the digital space within the tax net. Indeed, due to the virtual nature of digital activities, this has not been an easy feat to achieve, and has required global think-tanks, such as the Organisation for Economic Cooperation and Development (OECD), to identify novel mechanisms that would enable the effective capture of the digital space within the tax net.

Despite efforts to provide a global solution to the above challenge, a one-size fits all approach has not been effected, and therefore there is still leeway to develop a globally applicable framework. That said, it is noted that the G20 countries have, in principal, agreed on the development of a framework to enable the effective taxation of the digital economy.

In the interim, individual countries have sought to implement solutions that may best fit their particular circumstances. For Kenya, this culminated in the introduction of the Digital Service Tax (DST) regime, with the Finance Act 2019 setting the playing field and the Finance Act 2020 cementing the same. However, noting that the regime is still in its early stages, a few tweaks to the same have been effected via the Finance Act 2021.

The DST regime, applicable from 01 January 2021 and as expanded by the Finance Act 2021, seeks to tax in Kenya income accruing from a business carried out over the internet or via an electronic network, inclusive of a digital marketplace. For these purposes, a digital marketplace is defined under the Income Tax Act (ITA) as an online or electronic platform which enables users to sell or provide services, goods or other property to other users.

Under the expanded regime, any income earned by a business carried out through the internet or an electronic network would be subject to the DST regime, unless expressly exempted under the ITA.

Speaking of exemptions to the DST regime, Kenyan taxpayers may now breath a sigh of relief on the understanding that resident taxpayers have now been exempted from the ambit of DST. This was perhaps on the understanding that the imposition of DST on resident persons would have resulted in perennial refund positions to the extent that resident taxpayers were entitled to offset DST paid against income tax payable.

For non-resident persons, DST remains applicable at the rate of 1.5 per cent on the consideration received in respect of services provided. However, the due date of payment of DST has been aligned with the due date for filing of the DST self-assessment return. Consequently, DST is due for payment to the KRA by the 20th day of the following month following payment to the digital service provider.

Karen Kandie – MD, IDB Capital