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‘Kenya may be shooting itself in the foot’ with digital services tax, Fedha CEO says

By David Whitehouse
Posted on Tuesday, 23 February 2021 15:50

Kenya's Finance Minister Ukur Yatani holds up a briefcase containing the Government Budget for the 2020/21 fiscal year in Nairobi
Kenya's Finance Minister Ukur Yatani holds up a briefcase containing the Government Budget for the 2020/21 fiscal year in Nairobi, Kenya, June 11, 2020. REUTERS/Baz Ratner

Kenya’s tax on digital services risks stifling the development of the country's high-tech sector, Dhruv Pandit, CEO of Kenyan real-estate company Fedha, tells The Africa Report.

The digital services tax, which came into effect at the start of January, is 1.5% of gross transaction value. It is levied on the sale of e-books, movies, music, games and other digital content and applies to foreign companies. The government says the tax could generate up to $45m in revenue by June.

“It’s not the right time and not the right idea,” Pandit says from Nairobi. “There are other ways to generate revenue. Kenya may be shooting itself in the foot.”

Looking for cash

The Kenya Revenue Authority in June set up a special unit to track revenue on every digital transaction. Pandit says he understands where the government is coming from. It needs to increase the tax base and has limited available options.

The government is struggling with is high debt levels amidst the downturn that Covid-19 has caused.

Kenya has the potential to become an African tech hub and financial-services back offices could be run from the country, he says.

The country has good connectivity, Pandit says, and he expects last-mile connection costs to fall. The reality, though, is that “we are not a tech-friendly place.”

However, a recent report from the Harvard Business Review touts Kenya’s tech prowess and opportunities.

Low-value hurdles

According to KPMG, the lack of a turnover threshold for the tax could lead to significant administrative burdens for companies with low-value transactions.

  • “Many jurisdictions that have introduced a digital services tax have set thresholds to align the expected tax collections to the cost of compliance,” the firm says.
  • KPMG also cites the short timeframe for the new tax as leaving little time for companies to put compliance measures in place.
  • In Kenya, as in much of Africa, trade in services as opposed to goods, needs to come to the fore, says Pandit. “Much of the creative economy doesn’t work in Africa.” Free trade is “the only way we can bootstrap ourselves out. We have no choice.”

Real-estate prospects

Pandit sees the outlook for the Kenyan economy as “very bumpy” in the short term. The government, he notes, is unable to borrow cheaply like its counterparts in the West. Still, a growing population and urbanisation are long-term trends that will be unaffected by Covid-19, he says.

Fedha invests in real-estate in Nairobi and rents its properties to residential and commercial tenants. Pandit expects that the demand for corporate office space will continue to grow after the pandemic, though perhaps at a slower rate.

The trend of working at home is not as prevalent as some people assume, he says. Office workers still need to access quiet space. “Homes are noisy,” he says.

The Kenyan real-estate market has held up due to the limited availability of credit in the years before the Covid-19 pandemic, which meant that there was no bubble in prices, says Pandit.

Still, it will take time for oversupply to be cleared and a lasting recovery in real-estate prices in Nairobi could take between three and five years.

One “hotspot” is the demand for logistics space, an “intriguing” asset class in which Fedha may consider making investments.

Bottom line

Business leaders are worried about the impact of the new digital services tax and are calling for a rethink  that would help Kenya’s attractiveness as a digital hub.