JMK Partners Advocate


The integration and use of technology in almost every aspect of our lives has become the new normal. The business world is no exception. Internet accessibility and stability has led to the development of a digital marketplace, whereby buyers and sellers are interacting through online platforms either in the sense of business to business transactions (B2B) or business to customer transactions (B2C).

Needless to say, the taxman is always watching and the tremendous increase in the digital transactions has prompted a conversation for taxation of the digital services. Already, countries such as India and South Korea are adopting unilateral actions to introduce taxation of the digital space. Kenya is currently on its initial steps to introduce taxation to the digital world. This is exhibited in the amendments to the Income Tax Act, Cap 470 as well as the introduction of the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 as we shall analyze herein below.

Digital Service Tax on income accruing through a digital marketplace

The introduction of the Digital Service Tax, a tax intended to be charged on income accruing through transactions completed on a digital marketplace, began in 2019 through the provisions of the Finance Act, 2019. The said Act introduced an amendment to Section 3 of the Income Tax Act, Cap 470, by widening the scope of taxable income to include income accruing through a digital marketplace. The Act further defined a digital marketplace to be a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. To facilitate implementation of the charging of tax on income accruing through a digital marketplace, the Finance Act, 2019 further amended Section 2 of the Income Tax Act, Cap 470 empowering the Cabinet Secretary responsible for National Treasury to publish the relevant enabling regulations. It is unfortunate that to date no regulations have been published.

The lack of publication of the regulations as aforesaid informs why the Finance Act, 2020 amends the Income Tax Act, Cap 470 (ITA) to introduce a new form of tax known as Digital Service Tax (DST). DST shall be payable by a person whose income from services is derived from or accrues in Kenya through a digital marketplace. In addition, the DST shall be due at the point of transfer of payments for services to the service provider. It shall be payable at a rate of 1.5% of the gross transaction value. This tax shall, in case of a resident person or a non-resident person with a permanent establishment in Kenya be off-set against the tax payable in the year of income.

The payment of DST shall be effective from 1st January 2021 as per the provisions of the Finance Act, 2020.

Value Added Tax (VAT) on services supplied in Kenya through a digital marketplace

The journey to introduce VAT on digital services likewise began in 2019 through the provisions on the Finance Act, 2019. The 2019 Act amended Section 5 of the Value Added Tax Act, 2013 with the effect of empowering the Cabinet Secretary responsible for National Treasury to publish enabling regulations to facilitate collection of VAT on services supplied in Kenya through the digital marketplace. This empowerment recently prompted the Cabinet Secretary to issue the draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020. The main objective of the regulations is to create an enabling law for the purpose of accounting of VAT returns from taxable supplies of services made over a platform that enables the direct interaction between buyers and sellers of the services through electronic means.

Below is an analysis of the proposed provisions in the regulations:

1. Scope of Taxable Supplies

The regulations intend to introduce VAT on a broad range of digital supplies. These include:

  • Downloadable digital content including downloading of mobile applications, e-books and movies;
  • Subscription-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming;
  • Software programs including downloading of software, drivers, website filters and firewalls;
  • Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
  • Supply of music, films and games;
  • Supply of search-engine and automated helpdesk services including supply of customized search-engine services;
  • Tickets bought for live events, theaters, restaurants etc. purchased through the internet;
  • Supply of distance teaching via pre-recorded medium or e-learning including supply of online courses and training;
  • Supply of digital content for listening, viewing or playing on any audio, visual or digital media;
  • Supply of services on online marketplaces that links the supplier to the recipient, including transport hailing platforms; and
  • Any other digital marketplace supply as may be determined by the Commissioner.

2. VAT returns to be accounted by digital suppliers from outside Kenya

The Regulations not only intend to introduce VAT on taxable digital supplies made by online businesses established in Kenya but also taxable supplies from a non-resident person to a recipient in Kenya made through a digital marketplace. Example of the latter, is subscriptions to Netflix.

Therefore, in order to enable accounting of VAT returns from a non-resident digital supplier, the regulations propose a Simplified Registration Framework that allows registration of the non-resident digital supplier of taxable supplies. The application for registration shall be made online to the Kenya Revenue Authority (KRA) Commissioner through a prescribed registration form. Upon successful registration, the non-resident digital supplier shall be issued with a Personal Identification Number (PIN) for the purpose of filing and payment of VAT accrued on digital marketplace taxable supplies. The submission of return shall be due on or before the 20th day of the month following the end of the tax period.

Notably, a non-resident digital supplier that is unable to register for VAT in Kenya has the liberty to appoint a tax representative under the provisions of the Tax Procedures Act.

Further, the regulations provide that a registered non-resident digital supplier of taxable supplies who has ceased to offer the supplies in Kenya shall apply for deregistration from the KRA Commissioner.

 Noteworthy, a non-resident digital supplier shall be required to register with the Commissioner within thirty (30) days from the date of the publication of the regulations.

The regulations further provide that where an intermediary established in Kenya makes supplies on behalf of a supplier, the intermediary shall be responsible to account for VAT whether the supplier is registered for VAT or not.

3. Record keeping by a non-resident digital supplier

The regulations provide that a non-resident digital supplier shall, for every tax period, submit to the KRA Commissioner a record showing the value of all supplies made in Kenya and VAT deducted therewith. This is intended to enable proper accounting of the returns.

4. Input tax

Deduction of input tax shall not be allowed for non-resident digital suppliers. Nonetheless, it is improbable that non-resident digital suppliers shall have any deductible input tax.

5. Offences and Penalties

A person who fails to comply with the provisions of the regulations shall be exposed to a restriction of access of the digital marketplace in Kenya until such compliance is fulfilled. This is intended to ensure that digital supplies are kept at toes in complying with the provisions of the regulations.

At the time of publication of this alert, the regulations are not yet published and their enforcement depends on the publication.

Challenges likely to arise in implementing the taxation of the digital services

The taxation of digital services is inherently validated in the current advancing technological world. However, considering the novel nature of introducing digital taxation and the complex nature of digital transactions, it is inevitable that the implementation of such taxation will be met by certain challenges. These challenges include:

1. Double taxation

This refers to payment on tax twice on the same source of income.

In essence, countries have territorial jurisdiction to impose tax over subjects within their territory. Therefore, in an instance where a company is incorporated in foreign country and it derives income in Kenya through a digital marketplace, it is probable that such a company is susceptible to double taxation both in the foreign country and in Kenya on the same source of income.

2. Disclosure and transparency of income gains or value of supplies made through a digital marketplace

The disclosure of income gains for the purpose of collection of DST or the value of supplies for the purpose of filing VAT returns will depend inherently on the integrity of the person making the disclosure. Thus, it is likely that such disclosure may be distorted and collection of DST or accountability of VAT returns negatively affected.

3. Data Protection

The imposition of digital tax requires disclosure of personal data to the tax collection agent or authority. Such data is capable of being misused. Although Kenya currently enacted the Data Protection Act, 2019, it is argumentative on whether its scope of application applies to non-resident persons. In addition, the passing of a law is no guarantee of its implementation. In short it is better done than said.


With the development of the digital economy, its taxation has become a global concern. Countries are unilaterally adopting tax measures to tap the tax from the digital economy and Kenya is no exception as discussed above. However, as noted above there arises certain challenges on introduction of such taxation and successful implementation of collection of digital taxes relies on adoption of proper mechanisms to address the challenges.

In addition, the introduction of digital taxes in Kenya raises questions on its impact on the growth of emerging online businesses especially those that have a permanent establishment in Kenya. There is a concern that introduction of VAT on digital supplies is likely to increase the price in consumption of such supplies.  Subsequently, increase in price may lead to less demand of digital supplies which will negatively impact on the growth of upcoming online businesses. Nonetheless, taxation of the digital space is essential in the wake of wide use of technology in the economic world. The concern remains on when and how to properly introduce the digital taxation

This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. For further clarification, please do not hesitate to contact Jane Makena Kirimi( or Jacklyne Kanu (