Why the taxman is yet to hit jackpot in gambling

Three years since the government introduced a tax law targeting gambling, no meaningful revenue from the thriving sector has been collected.

The National Treasury had imposed a 20 per cent withholding tax on betting but the implementation has become a hard nut to crack with players pointing fingers away from them. 

A walk into a Nairobi casino revealed that there is a divergence of opinion among gamblers, casino managers and their regulator.

Whereas the gamblers admit that they have not paid a cent of their winnings to the taxman, some say the tax was to be implemented beginning January 2016. 

“Individual winners go home with all their money. If you win Sh1 million in a gaming bet, you will go home with your money intact,” said a senior official at the casino who asked not to be named as he is not authorised to speak.

“Casinos however pay the amount on a daily basis to Kenya Revenue Authority (KRA) officers on behalf of their clients.”

The Nairobi casino, like many others among the 43 licensed operators in Kenya, which contribute a gross annual revenue  of $18 million (Sh1.8 billion), appears not to have implemented the tax measures. The 20 per cent withholding tax was to begin January 1, 2014. 

The Betting Control and Licensing Board (BCLB), the regulator of the gaming industry, now wants the government to do away with the withholding tax and introduce a gaming levy which targets the gross revenue of an operator. 

“This is one industry which is a sleeping giant. The gaming inspectors out there are compromised, government is not getting its fair share of revenue, and the good course money is also not collected as stipulated by the law,” said Prof Paul Wambua Musili, chairperson of the BLCB in an interview at his office last week.

WITHHOLDING TAX

The withholding tax was introduced in the Income Tax Act through amendments to the Finance Act 2013.

Under the new law, every cent an individual wins in lotteries, gambling or raffles is taxable at the rate of 20 per cent.

In his 2015/16 Budget Statement, the National Treasury Cabinet secretary said the gaming industry has a huge potential.

It has however failed to follow up and address the loopholes that make collection of tax in the sector a nightmare.

The taxman is likely to scrutinise the industry’s revenues closer this year.

This may necessitate going back to the drawing board to ascertain what exactly has gone wrong in the implementation of the withholding tax. 

While the industry is booming, experts say the tax remitted to government is dismal.

The Association of Gaming Operators in Kenya has also filed a suit against the controversial withholding tax saying “clauses affecting taxation of winnings are contradictory and not clear on who should in fact pay the tax.”

“The inconsistency in two sections of the Finance Act 2015 make it impractical and impossible to implement the law and file the tax due to the Kenya Revenue Authority,” said the association’s CEO David Maoshi. 

DEFIANT OPERATORS

KRA which collects taxes on behalf of the National Treasury, began by warning the industry in January 2014 to ensure that all levies deducted since January 1, 2013 be remitted by February 20. The call was not heeded and gambling operators have been defiant since then.

Gaming operators say majority of their clients are tourists and are thus not covered by the Income Tax Act.  This, they say is the reason they are unable to comply.

“KRA does not issue PIN (Personal Identification Number) certificates to persons that are not ordinarily residents in Kenya. It is impossible to deduct money from them without exposing the association’s members to multiplicity of law suits for special damages,” said Mr Maoshi.

In deducting withholding tax, firms are required to collect personal details of payees. These include the PIN. A certificate is also supposed to be issued to the person from whose earnings the tax has been deducted.

Operators say demanding these details from the clients could have adverse effects to their business adding that the nature of the industry renders the tax model impractical.

Audit firm PricewaterhouseCoopers notes that Kenya’s gambling market should be earning KRA up to an estimated Sh500 million annually in VAT and withholding taxes.  

It is however unclear how much KRA earns from the sector.  KRA Commissioner General John Njiraini had not responded to questions by Smart Company by the time of going to print. The main question was how much KRA has collected from the tax since implementation, and how effective the tax system is.

KRA has put in place measures to ensure the taxes are delivered.  Casinos are fined a penalty of 10 per cent on the amount of tax they should have paid and an interest charge of two per cent a month on the principal withholding tax, as well as the penalties.

The BCLB said the penalties for breach of the provisions of the Act are very lenient as the fines are low and operators opt to ignore the taxes and face the penalties. 

The sector is booming with Kenyans enjoying the services of all four segments; lotteries, casinos, sports betting, promotions and prize competitions. Its entire gross gambling revenue is estimated to be in excess of $30 (Sh3 billion), which is expected to grow to about $50 million (Sh5 billion) by 2017. 

Statistics by the gaming regulator show that in the lottery business, there only two licensed operators, Kenya Charity Sweepstake and Oxygen 8 operate.  Sports Pesa is the most thriving of the gaming businesses with  28 operators licensed. Most of the operators own betting shops, while eight use the online/SMS platforms for betting. Leading names in these platforms are; Sportpesa, Beting, Betway, Oxygen 8 and mChenza.

“This segment has grown tremendously since 2013 when the first online sport betting operator was launched. It is estimated that the gross turnover in this segment is about $20 million (Sh2 billion) annually. With more competition, the gross revenue is expected to grow to $50 million (Sh5 billion) in the next three years,” said Prof Musili who has headed the BCLB for three years.

He said the BLCB is suffering from a weak legislative and institutional framework. For instance, it does not have an independent budget to execute its role.

The regulatory body does not have autonomy and relies on the staff and budget of the Department of Gaming for its operations, thereby compromising its financial and institutional independence.

“These are some of the factors hindering its mandate as an authoritative figure. The legislative framework does not provide for oversight in the use of good cause money,” Prof Musili said.

“The Act (Cap 131) does not take account of the advancement in technology and the integration of ICT into the gaming industry.”

He vouches for an elaborate IT system to track the operators’ earnings.

“In this regard the industry is way ahead of the regulator. The Act does not provide for the use of SMS and mobile money platforms in gaming operations. It does not provide for regulation of online gaming,” Prof Musili said.