E-commerce faces high taxes threat

Increased taxation of electronic money transfer services may slow down momentum in digital financial services and hurt efforts by the taxman to rope in more businesses and individuals operating in informal sector into tax bracket, industry players and researchers have warned.

The transparency which comes with increased use of mobile money services such as Safaricom’s M-Pesa and broadband services in a steadily digitalising economy, they argue, can be used to track and trace transactions in the thriving informal sector.

Increased penetration of smartphones and use of mobile Internet is also seen as an enabler for the taxman to access information on businesses and persons in the jua kali sector for taxation purposes.

Mr Bitange Ndemo, who teaches at the University of Nairobi’s School of Business, said higher taxes on mobile money transfer and Internet services, which have been embraced by the jua kali sector, raise the cost of such services.

E-COMMERCE SLOWDOWN

That may, in turn, slow down momentum in mobile money services which are rapidly evolving from person-to-person cash transfer platforms to an e-commerce tool, facilitating digital financial services such as instant loans and remittances by Kenyans abroad.

“You need to discourage people from actual physical currency and bring them to a space where you can be able to see them and one way of doing it is never to tax mobile money,” Ndemo said last month.

“But the government taxes that same thing which will increase transparency in the darkest of the dark areas and be able to raise money from that space.”

FUNDING BIG 4

Treasury secretary Henry Rotich successfully sought National Assembly’s approval to raise excise duty on mobile money transactions from 10 percent introduced in early 2013, to 12 percent in Finance Act 2018 signed into law on September 21.

Tax on making a telephone call and using Internet has also been raised to 15 percent from 10 percent as Mr Rotich eyes about Sh20 billion from increased taxes on mobile telephony sector to partly fund the universal healthcare plan.

“We appreciate that the government needs taxes to meet its fiscal objectives but our view is that increased excise duty on mobile money transfers will negatively impact mobile money transfer services and payments and slow down the drive towards a cash lite economy,” Safaricom Chief Finance Officer Sateesh Kamath said in an earlier engagement.

Duty on fees charged by money transfer agencies such as Western Union, MoneyGram and WorldRemit used by Kenyans abroad to send cash home, has also doubled to 20 percent.

“This is remittance coming into the country … to drive economic growth. Why would you want to curtail it?” Western Union’s Regional Vice President for Southern, East and anglophone West Africa Richard Malcom said in an interview.

“We don’t think that taxing that type of transaction has a benefit for both the regulator and end-user. The real risk that can arise is that if there’s higher tax, people might try and do informal transaction to avoid the tax.”

JUA KALI SECTOR

Kenya, like her peers in Africa, is struggling to tax businesses operating in the informal, or jua kali sector due to little or no data on their transactions, burdening the ones in the formal set-ups where income data is easily accessible.

Jua kali has been the main driver of Kenya’s growth in jobs over the years, accounting for nearly 90 percent of new openings created every year.

About 83.5 percent of the 16.9 million people in employment last year were in the informal sector, official statistics in the Economic Survey 2018, published by the Kenya National Bureau of Statistics (KNBS), show.

TAX BRACKET

The Kenya Revenue Authority (KRA) has come under fire from business lobbies such as Kenya National Chamber of Commerce and Industry for over-burdening a few people in the formal sector with increased taxes, while majority of the population remains outside the tax bracket.

About 3.2 million taxpayers had been registered on the electronic tax payment and filing platform, iTax, by June in a country with more than 19.6 million registered voters, a pointer that a majority of Kenyan adults may not be paying what is due to Caesar.

The popularity of mobile money transfer services has continued to grow among businesses and persons in the formal sector and the unbanked operating in the Jua kali sector.

CASH TRANSFERS

Mobile phone-based cash transfers, as tracked by the Central Bank of Kenya, have more than doubled in the last five years to Sh3.64 trillion last year — nearly half of the Kenya’s national wealth — from Sh1.54 trillion in 2012.

Mobile payments between January and September this year hit Sh2.93 trillion, a growth of Sh221.64 billion over the same period in 2017, latest CBK data shows.

“We know there’s a lot more money out there, especially among the small players, being transacted through these mobile platforms and we haven’t yet got hold of them,” KRA’s deputy commissioner for research Joseline Ogai told a tax summit in Nairobi on October 15.

“But because they are going through digital platforms, it’s just a matter of time before we start processing (tax) data on them.”

The taxman is this financial year ending June 2019 targeting mobile payments databases to catch about 500,000 additional taxpayers with gainful enterprises who are not in its 3.2 million iTax database.

This is expected to yield about Sh60 billion as part of its strategy to grow total tax collections to Sh1.69 trillion in the current financial year from Sh1.26 trillion in the one ended last June.