Some online-entrepreneurs in Kenya are considering changing their business models, others are still in dilemma of how to conduct their activities while a few are passing any extra costs to consumers following the introduction of digital services tax in the east African nation.
Kenya introduced the tax from Jan. 1 in a bid to shore up its revenues amid growth in digital transactions.
The tax is payable on income accrued in the country from services offered through a digital marketplace.
Digital services providers are expected to pay 1.5 percent of the gross transaction value, according to the Kenya Revenue Authority.
“In the case of the provision of digital services, one pays 1.5 percent of the payment received as consideration for the services and in the case of a digital marketplace, one pays the tax on the commission or fee paid to the digital marketplace provider for the use of the platform,” notes the agency.
Both local and foreign online businesses would be expected to pay the tax.
Among international online businesses targeted by the new tax are internet giants like Amazon, Alibaba, Facebook, Netflix and Google as well as local firms, a majority of them startups.
For established online businesses like the global internet giants, paying the tax may not pose any challenges, but for the local online-entrepreneuers, the new tax throws a spin into the trade at a time when it was picking up.
“I have an option of passing the tax to users of the app but this may kill my nascent business,” said Victor Ng’ang’a, who runs MyMech, an app that connects motorists with mechanics.
To use the app, mechanics and motorists must register their details. Then motorists can reach the mechanics in need.
While motorists register for free, mechanics part with 1,000 shillings (9.09 U.S. dollars), money Ng’ang’a must now start paying tax on.
The use of apps such as MyMech has lately become the easiest way for artisans to get business in Kenya.
Besides mechanics, masons, electricians, plumbers and painters are the other artisans using the apps.
Joseph Macharia, founder of Mkulima Young, a leading agricultural online marketplace in Kenya, said he may consider changing the business model to factor in the issue of the tax.
“We offer free services to farmers and consumers who sell and buy products. They don’t pay any fee, which makes us an enabler of business but we may now need to change the model because of the tax,” he said.
The app is used by farmers across East Africa and in other parts of the continent.
Like many other online businesses, the COVID-19 pandemic gave it a boost, with farmers turning to the app to beat restrictions imposed to curb the spread of the disease.
Analysts note that the digital services tax would slow down the growth of the sector at a time when citizens are being encouraged to embrace online trade.
“Many of the online startups may fall by the wayside because of the tax as some offer free services. Certainly, it will stifle uptake of online services and slow down the growth of the sector,” said Bernard Mwaso of Edell IT Solutions, a software development startup in Nairobi.
He added that the 1.5 percent tax will make online goods costly because the digital businesses will pass the charges to consumers, who also have to pay for courier services.
Tax experts have noted that the tax, whose turnover threshold has not been defined, could lead to significant administrative burdens for businesses with low-value transactions.