Gambling tax measures affecting revenue and killing jobs

Globally, the sports betting industry has seen exponential growth to become a lucrative sector with huge returns for investors and the economy. However, whereas the West, from where sports betting was imported, has devised ways of reaping the benefits, Kenya (and Africa at large) is still struggling with how to consolidate these economic gains as well as regulate the industry.

MONEY TRANSFERS

Measures so far taken — including imposition of taxation — have yielded little or no results economically. The government appears to think that, because of the huge interest that Kenyans have shown in the pastime, and the big winnings, there is a huge tax potential in sports betting, wrongly said to be worth Sh200 billion.

The industry has grown in the past five years but the gross gaming revenue (GGR) has remained in the 7.5-12 per cent threshold. GGR is the difference between net profit (wagers less winnings) and the tax the firm pays.

Since the Central Bank of Kenya recently announced that mobile money transfers hit a record Sh1.6 trillion in the first quarter of the year, is that the telcos’ revenue?

Again, this is neither a product nor service but sporting industry in which winnings determine payout. Much of what is held by the industry are investments of players or punters, from which a legally acceptable percentage is retained. Even in a bank, savings are not overall turnover; profits are calculated based on income and not the investments or savings of account holders.

Taxing investments is illegal and contravenes business principles. A serious rethink on taxation on betting and a legal review to include a determined revenue generation approach is necessary. Globally, illegal betting could be upwards of $500 million (Sh50 billion) due to such flaws.

A 2013 Global Betting & Gaming Consultants estimate shows gambling revenue as $430 billion (Sh43 trillion) in 2012. This is an increasingly vital part of the global economy. Some scholars say gambling is increasingly being used as a source of revenue by States with retracting economies.

INVESTORS' UNCERTAINTY

The United States and United Kingdom governments consistently and continually update their laws to keep pace with new realities. The Gambling Act 2005 in the UK, for instance, established the licensing of operators and ensures protection of consumers.

Attempts at consolidating economic gains from the industry began in 2017 with a 20 per cent tax on GGR. This, however, proved unviable and unworkable.

In revisiting the approach, the government initiated an unprecedented trend of inconsistent annual tax reviews. Every year since, there has seen a different tax approach and design.

This unpredictability limits investment viability yet President Uhuru Kenyatta is on record as stating that the government would create an enabling investment climate for investors in the local economy to do so with 20-, 30- or 50-year plans.

The government then rescinded withholding tax after a year for 35 per cent tax on GGR. It would change to 15 per cent tax on GGR, 20 per cent withholding tax and, recently, the proposed 10 per cent excise tax on wagers. This creates uncertainty for investors.

Sections 16, 18, 22 and 46 of the Betting Lotteries and Gaming Act provide for licensing of activities that may give rise to ‘winnings’. There is, therefore, a need for a broad and dynamic definition that allows room for growth and innovation in the industry. ‘Sin tax’ should be imposed in a manner that enables the industry to grow.

UNREASONABLE DEMANDS

The multiplicity of gaming activities also makes it impossible to collect the tax with different approaches and multiple cost options and application putting the methodology into question.

Withholding tax on sports betting could be informed by the need to deter excessive play by making the punter to not only share the tax burden but also feel the pinch of gambling.

Tax on winnings is a rare demand globally. There are adverse effects associated to introduction of winnings tax while lessening the tax burden on operators. Gamers are, thus, forced into cheaper foreign options without local tax jurisdiction.

Foreign companies are still accessible from Kenya online. Unreasonable tax demands enrich foreign firms while affecting local revenue and killing jobs. Playing platforms and payment gateways are Web-based open sources. So, increase in play costs drives customers to the platforms. The worst-case scenario is the proliferation of illegal gaming, which makes policing an uphill task.

Countries such as Uganda that have tried taxing winnings had to contend with irregular tax returns and declining tax responsibility.

The industry needs to be given a chance in law that defines gambling as part of the entertainment industry and not a source of income.

Mr Kung’u is the immediate former chairman of the Kenya Betting and Licensing Board. [email protected]