A coherence check is an assessment of the extent to which legal instruments such as the digital service tax (DST) achieve their own stated goals with effectiveness, effectiveness and efficiency. As the economic crisis deepens and Kenya‘s debtors begin to call, the Kenyan government’s coherence in its regulation is directly related to Kenya’s social and economic stability. While government regulation can be tangled, the consistency check framework makes it clear what regulation means to you.
The DST, which went into effect on January 1, 2021, is a 1.5 percent tax on the gross transaction value of all digital products and services in Kenya. The inexhaustible scope of products and services covered by this tax ranges from downloadable content to data analysis services. Reduced to the core of the regulatory intent, the DST is a transfer of wealth from private actors in the digital sector to the government. The short-term purpose of the DST is to increase the tax base, while the long-term goal can be seen to increase tax revenue. How consistent is a 1.5 percent tax on digital products, services and marketplaces with their own goals?
I meet Ndunge at her second hand clothes stand in a busy part of town while collecting a piece. Since the first COVID-19 lockdown, she has had to create an account with a popular social media application to open up new markets, make sure she doesn’t lose her long-standing customers, and most importantly, to weather the slump in demand in her sector. Ndunge’s online clothing sales are technically subject to the DST. She rejects my questions about summer time with âvile itakamâ (whatever will be). Ndunge is required to file DST declarations by the 20th of each month, but will not do so. It is strikingly detached from a fiscal rule that has the potential to destroy a business that it has painstakingly built. Our digital service provider explains that the government is not allowed to track 1.5 percent of all its business, a view they assure me is almost ubiquitous among their peers. The resentful bitterness that frames their views on the government and its taxes is a sign that their political disillusionment is turning into something utterly sinister.
The DST is a wealth transfer from private actors in the digital sector to the government.
On a philosophical level, Ndunge entered into a social contract with the Kenyan government when she started her business. They expected, consciously or unconsciously, a bundle of public services – access to political decisions and a say in the distribution of the tax burden in exchange for their taxes. Your perceived imbalances in this transaction, coupled with ongoing allegations of corruption within the government, have created a legitimacy loophole. Legitimacy is the most important component in managing any tax or compulsory law. It motivates compliance, promotes group discipline in compliance, and significantly reduces enforcement and monitoring costs for regulators. Without legitimacy, the incumbent government will have to use legal or other violence to achieve its compliance goals, and I think in Ndunge’s case it will have to.
To force Ndunge and the 86 percent of workers in Kenya’s informal sector into compliance with the DST, the government will undoubtedly have to invest significant resources in the tax infrastructure needed to register, motivate and monitor compliance. Because the DST is an experimental tax, this significant public investment must be made even in jurisdictions with robust tax infrastructures and legitimacy with no clear return on investment.
Based on the foregoing, the first question that arises in the case of summer time is its effectiveness. The regulatory decision must first be based on the assessment of how much coercive violence is necessary in order to achieve the goal of a greater tax reach and an increase in tax revenue. As outlined above, the government’s legitimacy gap, the need to invest in tax infrastructure, and the unclear return on investment raise questions about the feasibility of the DST.
The DST was designed by the Kenya Revenue Authority (KRA) as a prescriptive rule requiring the regulatory target (digital products and service providers) to register and submit their monthly DST declarations in accordance with the Finance Act 2020. However, a glaring design flaw is the flat-rate provision of the DST of 1.5 percent of the transaction value for all digital transactions, without differentiating income / turnover limits. The inability of the KRA to prioritize regulatory objectives or identify classes of digital services / products to be earmarked is primarily a penalty for local micro, small and medium-sized (MSME) digital businesses. It is not only amoral to contrast the compliance capacity of multinational digital content providers with the limited resources of MSMEs, but it sabotages the goals of the KRA.
Without clear regulatory priorities, the KRA is confronted with an overload of the system capacity, in which the regulatory resources are too thinly distributed to successfully strive for, motivate and monitor compliance. The natural balance that ensues is committed MSME compliance, the bedrock of the Kenyan economy and the primary regulatory target. Put simply, there is no incentive for a mediocre Kenyan lifestyle blogger without technical skills to calculate and follow and comply with the regulatory requirements of the DST. Furthermore, the expectation that it should cost as much for the blogger as it does for Netflix is ââabsurd. The DST has been shown to be ineffective in pursuing its own objectives here.
In addition to alienating the most important tax revenue-generating actors in this legal system, the DST will inevitably have a âdeterrent effectâ on the sector. First, there is a short-term loss of consumer welfare, as the digital actors, who can pass the cost of summer time on to consumers, have and will have. The more perverse effect of summer time, however, is the loss of the “silicone savannah,” the unregulated space of digital innovation, with worldwide recognition and repercussions.
It is not only amoral to contrast the compliance capacity of multinational digital content providers with the limited resources of MSMEs, but it sabotages the goals of the KRA.
There is a disgusting, but almost comforting familiarity with the destruction of extraordinary things, people and spaces in this country. The order is clear: a new and disruptive idea, technology, market or product is created and the novelty is exploited by the most disenfranchised to create capital. The now productive sector is attracting the attention of the government, which is focusing its monopoly power on regulation. Gradually, the inefficiencies of the “Kenyan experience” are emerging as incentives for innovation, growth and creativity are stifled. The capital that was previously owned and generated by the innovators is finding its way back into the political class and the industry wither, the status quo is maintained. In this way, unfortunately, âthe cookieâ âcrumblesâ in the digital product / service sector – the inefficiencies that other sectors have pursued are finally in the digital space. The distribution injustice of the DST towards young people, MSMEs and other disenfranchised groups is only more compelling in view of the rampant distorting effects of corruption in this legal system. Indeed, this tax is a perverse redistribution of resources from the most efficient interest group – disenfranchised private sector actors – to government. Summertime is obviously predatory in this case while holding back the growth of the sector.
As a political analyst, I wonder what the DST’s strategic regulatory intent was, given its cost-benefit margin. While the government is entitled to the benefits of the DST, digital financial service providers are exempt from the exemption. It is noteworthy that digital financial services providers are the main beneficiaries of a previously unregulated digital sector. Providers of digital financial services have developed their products in a regulatory vacuum and created economies of scale that enable them to survive in international competition today. As the most profitable economic entities in Kenya and possibly the East African Community, why should they be exempted from summer time? The economic justification for this exception is unclear, as these financial service providers experience a glut of profits once their investments in digital infrastructure have been amortized. An unmistakable interest group policy is at play here, which calls into question the will to regulate this tax.
The more perverse effect of summer time, however, is the loss of the “silicone savannah,” the unregulated space of digital innovation, with worldwide recognition and repercussions.
A coherence check of the digital service tax clarifies the ineffectiveness, ineffectiveness and inefficiency of its intention, structure and effect. I believe that the government’s legitimacy loophole is likely to fuel committed non-compliance with regulatory goals. In order for the KRA to achieve its regulatory goals, it must therefore use legal force. In addition, the blanket provision of the DST is a restrictive design feature that discourages compliance, creates perverse incentives and inhibits growth and innovation in the industry. These distorted results all ensure that the KRA’s eager attempts to substantially increase tax coverage fail. After all, the exception of digital financial service providers from the scope of the DST is an indication of interest group policies in the industry that are hostile to growth and innovation.
Given the negative impact of DST, MSMEs and other interested stakeholders in the sector need to face the growing tide of incoherent regulation by urgently organizing and participating in the regulatory process. The recent increase in internet taxes (Finance Act 2021) is an indication that the government will not let up in its redistribution efforts. Digital service providers must form a clearly defined interest group, because only through preventive cooperation with the Ministry of Information, Communication and Technology in relation to its guidelines, positions and tools can they have the analytical and relational ability to act according to the provisions of their contemporaries in the digital financial services sector.