Audit Firm Exposes Loopholes in KRA's Digital Tax

  • KRA offices in Nairobi.
    A file image of the reception area at KRA offices in Nairobi.
    KRA
  • Audit firm PwC Kenya has exposed a number of loopholes in the Kenya Revenue Authority's Digital Service Tax (DST) that came into effect on January 1, 2021.

    PwC manager and corporate tax specialist Nicholas Kahiro raised out concerns arise on many occasions when KRA issues digital tax notifications and demand DST without fully understanding the business model.

    "The legal ambiguities include KRA’s general position that all services provided electronically are subject to DST even if no digital marketplace exists with KRA issuing DST notifications and demanding DST without fully understanding the business operating models,” Kahiro stated. 

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    A Kenya Revenue Authority (KRA) signage on a building
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    He pointed out loopholes among them compliance issues ranging from registration to payment. He noted that this was yet to be configured on the iTax platform.

    He also pointed out a lack of consistency on tax positions and revenue streams. He added that this affected online businesses and personnel who primarily earn on a commission basis.

    Further, the audit firm questioned the interplay between DST and minimum tax arguing that KRA did not clarify whether DST can be used to offset minimum tax.

    The minimum tax applies to all businesses whether they make a profit or not. The authority charges one per cent of the gross sales for all businesses. However, due to the ongoing cases in court, the minimum tax has been put on hold. 

    The final issue, the firm noted, is that DST returns are configured on iTax as a payment return and not as a monthly return.

    KRA, however, disputed the claims in a statement sent to Kenyans.co.ke. The authority noted that the iTax platform had been advanced to enable taxpayers to register and pay the taxes. 

    Further, KRA affirmed that the Finance Act 2020 section 12E had had clearly defined the scope of digital service taxation.

    "Digital service means any service that is delivered or provided over a digital marketplace; digital service provider means a person who provides digital services through a digital marketplace and a platform means any electronic application that allows digital service providers to be connected to users of the services directly and indirectly and includes a website or mobile application," read part of the Finance Act 2020.

    The digital service is a new tax, payable by both residents and nonresidents who earn income in Kenya through the digital marketplace. KRA charges 1.5 per cent of the gross transactional value.

    The authority currently targets Ksh5 billion from DST returns by the end of June 2021. 

    A man pictured while working on his personal computer.
    A man pictured while working on his personal computer.
    File