EA economies bank on digital tax to shore up budget funding

East African countries are racing towards taxing digital services revenues in a desperate move to boost revenue collections, narrow fiscal deficits and tame excessive borrowing.

Rwanda has announced plans to start taxing digital services such as Netflix and Amazon as the country looks to expand its tax base, but there are fears the decision could scare off investors from the budding digital services market.

Details about which platforms will be taxed, the modes of taxing and projected amount that Rwanda looks to gain are still unclear since the proposal is still being reviewed by the Ministry of Finance and Economic Planning.

Rwanda Revenue Authority (RRA) is expected to conduct an impact assessment before implementation of the policy.

The taxman has been looking for ways to expand its tax base even as its collection exceeded targets by over $60.1 million in 2020/2021 despite disruptions.

Jean-Louis Kaliningondo, RRA’s deputy commissioner general said as the market for digital services in Rwanda grows, it is only fair that the country gains from it.

“We have not laid out all the details yet but Rwandans who consume these services are using the money generated here. It is also unfair when we tax local digital companies that might not even have as many clients as these companies,” said Mr Kaliningondo

He said companies would pay Value Added Tax (VAT) but this might not affect consumers.

Platforms to be taxed might include social media influencers and Rwandan nationals who are making money off these platforms, he added.

Rwanda follows other African countries including Nigeria, Zimbabwe and Kenya that have started taxing such services as companies like Netflix look to expand their footprint on the continent. But analysts say an increase in prices from the levy could interrupt uptake of digital services in Rwanda.

The percentage of Rwandans with access to the internet jumped from 17 percent in 2017 to 23 percent in 2020.

Kenya, which has levied digital platforms has an internet penetration of 40 percent while and Nigeria’s internet penetration stands at 50 percent.

Angello Musinguzi, a senior tax manager at KPMG Rwanda says Rwanda is ready in terms of technology and tools needed to tax digital companies but doubts if the market is ready for the imminent effects.

Increase in online transactions

Kenya which implemented the digital services taxation programme in January 2021 is targeting revenues from the sector to fund part of its Ksh3.32 trillion($29.12 billion) spending plan for 2022/2023.

The country’s digital market revenues are projected to hit $3.95 billion this year from $1.92 billion in 2017 after a surge in online and mobile transactions owing to the Covid-19 pandemic, analytics firm Statistica says.

In this year’s Budget Policy Statement, Kenya’s National Treasury Cabinet secretary Ukur Yatani said taxation of the digital economy is part of the government’s tax base expansion programmes to shore up the country’s weakened revenue base amid rising spending pressures.

Kenyan is seeking to increase the share of revenues in gross domestic product (GDP) to 17.4 percent in 2022/2023 from 16.3 percent in the current fiscal year while reducing expenditure to 23.7 percent of GDP from 25 percent.

The National Treasury expects to spend Ksh3.32 trillion($29.12 billion) in 2022/2023 from Ksh3.15 trillion($27.63 billion) in 2021/2022.

The fiscal deficit is projected at Ksh846.1 billion ($7.42 billion) in 2022/23 compared to the estimated overall fiscal balance of Ksh 1.02 trillion ($8.94 billion) in 2021/22.

This fiscal deficit will be financed through net external borrowing of Ksh 275.9 billion ($2.42 billion) and net domestic borrowing of Ksh 570.2 billion ($5 billion).

Kenya introduced the Digital Service Tax in the Finance Act 2020, and it became effective from January 1, 2021.

It is payable on a monthly basis at the rate of 1.5 percent of the gross transaction value of the digital services offered.

Services affected by the tax include downloadable digital content such as mobile apps, e-books and films and over-the-top services like streaming television shows, music or podcasts.

Services affected

Other services chargeable are media subscriptions and the monetising of data about Kenyan users that has been generated from the users’ activities on a digital marketplace.

Also to be taxed is the income received from electronic booking or electronic ticketing services and provision of search engine and automated help desk services.

Online distance training through pre-recorded media or e-learning are also subject to a 1.5 percent tax on the gross value of the transactions.

In Tanzania, the government is also aggressively pursuing taxes from online businesses.

Last weekend, the Tanzania Revenue Authority (TRA) requested all persons with digital businesses to register them and acquire the taxpayer identification number (TIN) to start paying tax as required. "We realise there are people who do not have shops and do not have a TIN for the business they conduct. Some have large warehouses, stores and products that they sell digitally. Now you all have to come and register," reads TRA’s tweet posted on March 11.

Richard Kayombo, director for Taxpayer Services and Education at TRA, told The EastAfrican that any business with an annual turnover of Tsh4 million ($1,719.87) should pay taxes.

The law on taxation also requires all businesses, physical or digital, that make Tsh14 Million ($6,019.55) profit and above to issue electronic fiscal fevices (EFD) receipts.

“All this is to curb tax fraud, tax evasion but also avoid unfair competition for physical businesses and other taxpayers,” said Mr Kayombo

However, some traders say the directive is not practical for online businesses and want the government to allow the sector to grow before setting up mechanisms for online businesses to pay taxes.

Mr Kayombo warned business owners who do not comply of a possible crackdown for tax evasion.

Taxing social media use

In Uganda, the digital service tax was introduced in May 2018 to prevent gossip and broaden the country’s tax base. As from July 2018, internet users in the country seeking to access social media sites are required to pay the daily duty tax of Ush 200 ($0.05).

According to a report by global human rights group Future Challenges e.V, more than 60 online platforms — including Facebook, WhatsApp and Twitter — were affected by the tax in Uganda and the country lost nearly 30 percent of internet users between March and September 2018.

In January 2020, the Uganda Revenue Authority proposed a policy shift to the tax by arguing that instead of imposing the social media tax that is collected through mobile money, the taxman could impose a direct tax on internet bundles by amending Schedule 2 of the Excise Duty Act to stop tax evasion.