On 10th June 2021, the Kenyan Treasury Cabinet Secretary Mr. Ukur Yatani read the budget for 2021/2022. The theme of this yearâ€™s budget is â€œBuilding back better with the aims to focus on economic recovery in the wake of the COVID-19 Pandemic.â€ The budget is estimated to be at about Ksh. 3 trillion making it the most expensive budget in Kenyaâ€™s history. It is also estimated that at least 66% of all revenue raised will go towards debt repayment.
When it comes to the technology sector, there are a number of proposed measures in the budget that will affect it as highlighted below:
- Expansion of Digital Market Place definition.
The Budget proposes amendments to the Finance Act 2019 that introduced VAT and Digital Service Tax on digital services. Treasury wants to expand the definition of Digital Market Place to include: income accruing from a business carried out over the internet or an electronic network including through a digital marketplace is subject to tax. It also proposes that the term digital marketplace should be clarified. Currently, the tax applies to the following:
- 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;
- 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
It is important to note that VAT on a Digital Market place only applies to non-resident business from an export (foreign) country providing a service to a Kenyan consumer. A Business in an export country providing services to a Kenyan consumer shall be required to charge, VAT on the service as this is a (Business to Customer) transaction. While for a Business in an export country providing services to a Kenyan business (B2B), the Kenyan business is required to inform the business from the export country that this is a (B2B) transaction. Therefore, they shall tell them not to charge VAT
The impact of this in the technology sector is that the government aims to widen the number of entities that will fall under the digital tax. Further, it will also increase the cost of doing online business in Kenya for entities that are classified as non-residents for tax purposes in Kenya.
- Digital Service Tax (DST)
The Bill proposes to amend the current provisions on Digital Service Tax to provide that:
- Digital Service Tax will be applicable to income of non-resident persons only;
- The offsetting of DST against tax payable for that year of income by a resident person or non-resident with a permanent establishment is deleted.
- A person subject to digital service tax shall be required to submit a return and pay the tax due to the Commissioner on or before the 20th day of the month following the end of the month in which the digital service was offered
- Digital Service Tax shall not apply to: non-resident income arising from the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication chargeable under section 9(2); and income subject to withholding tax under section 35 of the Income Tax Act
The exception of Digital Service Tax for income accrued by residents comes as a relief to technology companies operating in Kenya especially start-ups. It also makes Kenyan businesses compete favorably against the large multinational technology companies that operate in Kenya but are not residents for tax purposes. The tax may also act as an incentive for Multinational technology companies to set up offices in Kenya in order to avoid paying this tax and VAT which also applies to non-residents.Â Â
- Tax Procedures Act, 2015
The Treasury seeks to amend the Tax Procedures Act to provide the Commissioner with a basis for seeking the intervention of a relevant authority in the collection of tax where a person who provides services over the internet or an electronic network including through a digital marketplace has not fulfilled the personâ€™s tax obligations.
They also seek to obligate persons who trade through selling goods and services over a digital marketplace to apply for and obtain PINs from the Commissioner.
The effect of this amendment is that, it provides a basis for the commissioner to seek intervention from other government agencies in the enforcement of the digital tax laws.
Further, anyone selling goods and services online will be required to have a PIN for tax purposes this may also apply to non-residents who have to remit VAT and Digital Service Tax to KRA.
- Initiation of a National Tax Policy Framework
The Budget proposes the introduction of the development of a National Policy Framework that will guide the formulation, consistency, and certainty of tax legislation and management of tax expenditure in Kenya.
Kenya has always struggled in having a consistent taxation policy and the result of this has been the introduction of taxes abruptly without proper consultation. The development of a national tax policy framework will act as a guide to companies including technology companies on the expected taxes and the effects they will have on their companies. These will enable companies to plan adequately for taxes. Technology companies and stakeholders are encouraged to participate in the formulation of these National Tax Policy Framework.
- Tax Rebate for purchasing large amount of data for resale
Under the Finance Act, 2018 Kenya introduced a 15% Excise Duty on Telephone and internet data service by amending the Excise Duty Act 2015. The effect of this was the rise in the cost of purchasing data in Kenya. The Finance Act 2021 proposes a rebate which is a partial refund of tax for the purchase of bulk amounts of data for resale purposes. This provision is meant to avoid double taxation by allowing a person who purchases internet data for resale to claim the excise duty they paid on the bulk data.
The effect of this is that, it may lead to a decrease in the cost of purchasing data in Kenya.
- Amendment of the Excise Duty Act
Treasury proposes to introduce a charge of 20% excise duty on fees or commissions earned in respect of a loan. This is meant to expand the tax base by removing this exclusion and also discourage financial institutions from charging exorbitant fees for processing loans.
This has the potential of making loans more expensive and inaccessible especially to technology companies which are already billed as a risky borrower and are in dire need of money due to the effects of the COVID-19 pandemic.
- VAT RefundsÂ
The treasury proposes the refund of VAT amounting to Ksh. 10.0 billion and clearance of pending bills amounting to Ksh. 13.1 billion
If you are an ICT company that is entitled to claim a VAT refund from the government, you will now be able to claim it. Further, if you are an ICT company that has done business with the Kenyan government and had not yet been paid, the government has set aside money in the proposed budget to ensure that your bills are settled.
- ICT procurement decentralizedÂ
From 1st July procurement of ICT service by state departments will be decentralized.
Initially, procurement of all ICT services by state departments had to be done through the ICT department. This will assist state agencies to be able to easily procure ICT equipment that caters to the needs of the department.Â Â
- Digital Literacy Programme and ICT Integration in Kenyan Secondary Schools
The treasury has set aside Ksh. 420 million for the Digital Literacy Programme and ICT integration in Kenya Secondary Schools.
This provides a good opportunity to enhance digital literacy in Kenyan schools and prepare students for the digital economy. In addition, technology companies can find ways of partnering with the Kenyan government to facilitate this digital training initiative and consequently earn from it.
- Digitizing the Economy
The treasury has set aside the following amounts of money to leverage on the digital economy
- The government shared services and Digital Literacy Programme-Â 20.9 Billion
- Konza Technopolis City (Horizontal Infrastructure Phase I)- 12.0 billion
- Konza Technopolis City (Konza Data Centre and Smart City Facilities)- 3.6 billion
- Konza Technopolis City (Construction of Konza Complex Phase 1 B)- 400 million
- Konza Technopolis City (Konza Technopolis Masterplan)- 200 Million
- Maintenance and rehabilitation of the National Optic Fibre Backbone Phase II Expansion Cable- 1.2 billion
- Installation and commissioning of Eldoret-Nadapal Fibre Optic Cable 1.1 billion
- Last Mile County Connectivity Network 463.0 million
Technology companies can take advantage of the amount set aside for government shared services to provide ICT services to the government.Â
The government isÂ pushing ahead with its plan for the development of the Konza Technology City which has faced a number of delays over the years. Konza, if fully released, is envisioned to be a key flagship project of Kenyaâ€™s Vision 2030 economic development portfolio.Â
Also, the maintenance of the National Optic Fibre Backbone is important to ensure the provision of internet services. Last-mile connectivity is also key in ensuring every citizen in Kenya has access to steady and reliable internet.Â
- VAT exemptions to the renewable energy sector
The treasury has proposed the amendment of the VAT Act to provide exemptions for specialized equipment for the development and generation of solar and wind energy, including photovoltaic modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power.
Technology Companies in the renewable energy sector can take advantage of this exemption to enable them to grow their business. It will also make Kenya an attractive investment hub for renewable energy technologies.
List of Proposed Legislations that will be amended
- Finance Act 2019
- VAT Act
- Excise Duty Act 2015
- Tax Procedures Act, 2015
- Income Tax Act
KRA Highlights of the proposed amendments under the Finance Bill 2021/2022: https://media-exp3.licdn.com/dms/document/C4D1FAQEQhtZuYMBGjw/feedshare-document-pdf-analyzed/0/1622897596420?e=1623567600&v=beta&t=DBm0kUJg4UsSoqNfiFYDHd3gSZ6YQ_LLkUVaGBPtiaIÂ
Vellum Kenya Budget Statement
Mwenda Tevin is an Advocate of the High Court of Kenya and a policy associate at KICTANET.