Experts discourage introduction of digital tax with 1.5% witholding

The National Treasury is being cautioned against introduction of digital service tax that could be potentially lockout individuals who look at online ventures for employment as companies embark on layoffs due to coronavirus economic fallout.

EY Tax Partner Francis Kamau says the government needs to reconsider implications of the proposed withholding tax at the rate of 1.5 percent which could lead to double taxation.

Online retail businesses became the subject of taxation in 2019, following amendments to the Finance Act, which sought to clarify that income from digital transactions attracts VAT.

At the end of April, KRA directed business owners trading on digital platforms to charge Value Added Tax on their transactions and remit the taxes to KRA. 

Treasury proposes to introduce a digital service tax through a 1.5 percent withholding tax to help fund the Kshs 3 trillion 2020/2020 financial year.  

The plan is to ensure tech giants like Facebook, Google, Twitter, WhatsApp among other players.

According to Kamau, the state needs to study the implication of the move such as double tax treaties and cost of collecting the tax through agents.

Ernst and Young further discourages proposals to introduce minimum tax which could impact negatively on loss making entities as well as taxing National Social Security Fund income.

However, recent incentives to reduce PAYE and corporate income tax have been backed to salvage losses brought about by Coronavirus pandemic.

The government has also been advised to promptly introduce warehouse receipt system to ensure credit flows to agriculture sector to help it bounce back.