Online shopping keeps consumers out of KRA reach

Increasing purchase of books and entertainment products through the internet is denying the Kenya Revenue Authority consumption tax.

A recent survey of 1,700 people by TNS Research International and the Kenya ICT Board found that 18 per cent and 24 per cent of the respondents buy music/movies and electronic books online, signalling the growth of online shopping.

The Kenya Revenue Authority collects taxes, including VAT or consumption tax on goods and services delivered physically to consumers.

But online-based transactions where consumers pay for and receive music, movies and electronic books among a range of other virtual goods from foreign vendors are a new model that leaves consumers out of the VAT tax bracket.

“If one buys a music CD in town, he pays a tax on the commodity the same way he would if he orders it online but have it physically delivered from the supplier. But if the person buys and downloads the music online from a foreign vendor, no consumption tax applies,” said Mr Rajesh Shah, a tax partner at PriceWaterHouseCoopers (PwC).

“The major problem is that tax laws have not kept pace with the development of electronic commerce. Consumers have no obligation to pay for things they buy online,” he added.

Analysts reckon that the trend where middle and upper class consumers pay to download software, books, music, videos, and electronic version of books from vendors like Amazon will grow in the coming years on the back of rising incomes and a more reliable internet infrastructure.
A new report by PwC projects the value of consumer spend on digital entertainment and media products in Africa and Middle East to grow at a compound annual rate of 4.6 per cent to reach Sh46.5 trillion in 2014.
In Kenya, professionals and companies are already taking up smart phones and new communication devices like the iPad, a computer tablet, that allows users to buy a host of applications from centralised virtual stores developed by companies in the developed world.
Kenya is among the fastest and most sophisticated adopters of technology in Africa and a rapid growth of global e-commerce means millions of shillings spent by consumers will go untaxed.
Analysts propose several solutions that could bring the new shopping styles under the tax bracket.
The easiest solution is to have the foreign vendors set up local subsidiaries or team up with local agents so the consumption tax is collected by their local representatives. 
This is the model applied by pay TV provider Multichoice which broadcasts to a regional audience but viewers in each jurisdiction pays consumption tax to the conglomerate’s local operatives for onward remittance to tax authorities.
Other solutions involve international trade co-operation and changes in tax laws.
Foreign companies, for instance, can collect consumption tax based on the specific rates levied by the country where their consumers come from and then remit the same to local tax authorities.
“The tax laws can be amended and technological infrastructure set up to put the obligation on consumers to pay taxes on the value of their spend on intangible goods in a reverse, self-assessment system,” Shah said.
The internet has created a border-less environment, knocking down national boundaries that governments depend on to tax residents and nationals, leading to a raging debate on whether or not to tax e-commerce.
Some analysts say the value of tax from e-commerce transactions is still small but will rise in the coming years, adding that failure to tax e-commerce will leave governments with a smaller tax base.
In such a case, States are likely to increase direct taxes to fund public projects, a move that will hurt trade and investments.
In addition, raising taxes is seen as a way of entrenching equity in global trade.
“What is important is to correct the competitive imbalance and to establish an equitable taxation structure that addresses e-commerce in a fair and realistic manner,” the European Commission said when it introduced taxes on e-commerce in Europe.
But others argue that levying tax on e-commerce will hinder its growth.

By VICTOR JUMA