The proposed tax regulation in Kenya, mandating that e-commerce platforms withhold 5% of payments to suppliers, has ignited concerns across the industry, with warnings that it could potentially destabilize the sector.
Key players like Jumia and Glovo, alongside smaller online retailers, might face operational and financial strains so severe they could result in shutdowns and job losses.
E-commerce in Kenya, which has grown exponentially over recent years, is driven by rising digital adoption, the widespread use of mobile payment systems, and young entrepreneurs keen on tapping into online marketplaces.
Forecasts suggest a robust annual growth rate of 16.4% through 2025.
However, the introduction of a withholding tax may present a substantial barrier, greatly undermining this upward trajectory by compressing profit margins and dissuading investment.
Small and medium-sized businesses (SMEs) are particularly vulnerable under the proposed tax.
Many of these enterprises rely on established e-commerce platforms to access customers, but if compliance costs increase and earnings decline, their sustainability could be jeopardized.
Reduced profit margins mean less capital for reinvestment, which could affect the growth prospects for these businesses.
SMEs, which already struggle with limited resources, may find it difficult to absorb the added financial burden.
With these constraints, some may opt to exit the market, contributing to a less competitive e-commerce landscape. Consequently, the withholding tax may not only stifle small businesses but also limit consumer choices in Kenya’s digital economy.
This withholding tax is part of a broader array of fiscal reforms in the Finance Bill 2024, aiming to bolster tax revenue from the digital economy.
Alongside the withholding tax, the bill seeks to replace the earlier 1.5% Digital Service Tax with a 6% Significant Economic Presence (SEP) Tax on non-resident companies.
Additionally, there is a proposed 20% tax for non-resident firms and a 5% withholding tax on resident suppliers, which could collectively inflate operational costs and create barriers for global e-commerce platforms looking to invest in Kenya.
The tax changes thus risk deterring international firms from entering the Kenyan market, which could reduce competition and limit the digital sector’s potential for growth.
The potential repercussions extend beyond the corporate sphere, impacting initiatives that aim to empower youth and SMEs through digital channels.
For example, BrighterMonday’s “e-Biz Kwa Vijana” project, which has been instrumental in providing thousands of young entrepreneurs with digital skills and access to e-commerce platforms, may see diminished effectiveness if profitability in the sector declines.
By adding financial pressure to these platforms, the new tax policies could discourage engagement from youth entrepreneurs and small businesses, ultimately slowing digital transformation.
This could undermine efforts to build a tech-workforce in Kenya, contrasting sharply with the government’s stated goals of fostering economic empowerment and promoting digital innovation.
Industry stakeholders are appealing to the Kenya Revenue Authority (KRA), legislators, and relevant government agencies to revisit these tax measures to safeguard the sector’s sustainability.
E-commerce players argue that if left unmodified, these tax requirements could erode Kenya’s status as a leader in the digital economy in Africa.
There is a risk that excessive taxation could drain the vibrancy of Kenya’s digital marketplace, leading to layoffs, business closures, and reduced innovation.
For Kenya to maintain its digital edge, policymakers must strike a careful balance that nurtures growth while ensuring fair contributions to national revenue.
Should these tax policies proceed as planned, the consequences may be profound.
Not only could Kenya lose out on the benefits associated with a thriving e-commerce sector, but it could also miss an opportunity to build a digitally empowered economy.
The stakes are high for the government to carefully consider the full impact of its fiscal reforms.
To sustain the momentum in digital growth, the government will need to devise a tax framework that encourages innovation, supports SMEs, and enables the e-commerce sector to flourish within the broader economy.
