A few weeks ago, the government announced that it would not be renewing operating licences for gambling companies and ordered the suspension of their M-Pesa paybill accounts and short codes.
The bone of contention is a tax claim dispute of Sh61 billion which KRA insists betting firms owe. The dispute arises from the interpretation of the word ‘winnings’ in Section 34(1), 34(2), 35(1) and 35(3) of the Income Tax Act, which only states that all winnings shall be subject to deduction of 20 per cent withholding tax.
According to KRA, this tax should be deducted from the total payout; for example, if ones stakes Sh1,000 and wins Sh500, the 20 per cent withholding tax should be applied on the Sh1,500, amounting to Sh300 in tax.
However, betting firms argue that KRA is erroneously lumping together the customer’s stake and the winnings. They say the withholding tax should only apply to the Sh500, therefore the amount to be remitted is Sh100 and not Sh300.
KRA’s position is flawed. Its interpretation of the word “winnings” as the item upon which the 20 per cent withholding tax should be levied, is extortionist because, if one stakes Sh100 and wins only Sh20, the withholding tax will be Sh24, meaning the winner receives Sh96, a lesser amount than what he/she staked. This is taxing consumption before the consumption happens.
Withholding tax principally applies to payments of income and gain, therefore the stake is not a taxable item.
Studies on gambling taxation reveals that it is low-income households who contribute relatively more gambling tax revenue in relation to their income.
In Kenya, and according to a joint survey recently conducted by Ipsos and Geopoll, the average spend on betting is Sh1,550 a month, which is Sh380 a week, or Sh55 a day.
Apart from the 20 per cent withholding tax, KRA also collects another 15 per cent betting tax levied on betting firms’ gross gaming revenues, and a further 30 per cent corporate tax. In Germany, the tax levied on gross gaming revenue is at 5 per cent; United Kingdom at 15 per cent, and South Africa at 9.6 per cent.
The understanding is that the gambling sector should attract tax rates over and above the ones applied to other businesses. But is high gambling tax good economics?
Gambling activity has an elastic demand; an increase in gambling taxes leads to low betting activities and reduced tax revenue collection. Consistent increase in gambling tax is not desirable if gross gaming revenue goes toward public revenue, since technology has allowed tax havens like Malta to house online gambling operators.
If KRA does not review its stand, it might find itself on the losing end.
Mr Watima is an economist