An analysis of the effects of the Digital Service Tax on online transactions.
Digital Service Tax ( DST) is a tax that is payable on income derived or accrued in Kenya from services offered through the internet or any electronic network, application or website.
A digital marketplace is defined as a digital platform that creates a venue for both purchasers and sellers to transact over a product or a service. It matches potential buyers of a service or a product with providers of that service or product.
What is the Governing Law on Digital Service Tax?
The Digital Service Tax was introduced by the Finance Act of 2020 and became effective on the 1st of January 2021. Section 4 of the Finance Act 2020 amended section 12 of the Income Tax Act CAP 470 by inserting section 12E of the Act.
Who is liable to pay Digital Service Tax?
Digital service tax shall apply to the income of a resident or non-resident person derived from or accrued in Kenya from the provision of services through a digital marketplace that is, through the internet or an electronic network.
With the widespread use of the internet as a medium of transacting business, the taxman established this tax in a bid to ensure that income accruing in Kenya from service providers that who are foreigners with no permanent residency here in Kenya, is also chargeable to tax.
What are the affected services?
Regulation 3 of the Income Tax (Digital Service Tax) Regulations of 2020 provides for the digital services liable to DST 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;
- provision of 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 held desk services including supply of customized search engine services;
- online distance training through pre-recorded media or e-learning including online courses and training; and
- any other service provided through a digital marketplace.
The applicability of DST is however, limited to a digital service or supply of a commodity on a digital market that is provided to a user/ client/ customer located in Kenya. The factors used in ascertaining whether the user is located in Kenya are: –
- if the services are acquired from an IP address registered in Kenya or an international cell phone country code assigned to Kenya that is “+254”.
- If the user of the digital market has a business, residential or billing address in Kenya.
- If the user accesses the digital interface from a terminal located in Kenya, where terminal includes a computer, tablet and mobile phone.
- the payment for the digital service is made using a debit or credit facility provided by a financial institution or company located in Kenya.
It is worth noting that the DST is imposed on the gross transaction value of digital service as follows: –
- in the case of the provision of digital services, the payment received as consideration for the services; and
- in the case of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the platform.
It is worth noting that, the gross transaction value of a digital service does not include the VAT charged for the service.
This seeks to avoid double taxation where the taxman would demand more than one tax from the same transaction, which in the instance would be VAT charged on the service as well as income tax from the income garnered from the provision of the service.
The introduction of digital service tax is an indication that the digital market space has exponentially grown over the years. Undoubtedly, most businesses now have an online presence and therefore it is important to know how DST works and how to ensure compliance to avoid default.
We at CM Advocates LLP, have an experienced team of tax practitioners who offer tax law advisory services on existing and emerging tax laws to ensure our clients are compliant. We would be more than delighted to offer trainings on the DST as well as undertake an audit of your business venture for purposes of advising on the applicability or otherwise, of the DST.
For more information, visit our website firstname.lastname@example.org or contact us at email@example.com.
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Contact Persons & Contribuors
Jane Mugo- Partner & Head of Unit
Angela Ndolo- Associate
George Manyara- Associate
This article is for informational purposes only and should not be construed as legal advice.