Kenya: High betting taxes detrimental to the economy

​​published on March 21, 2018
 

​Kenya levies 35% tax on gross gaming revenue besides the 30% corporation tax. Lotteries on the other hand are required to dedicate 25% of their sales to charities before considering winnings and other operating expenses. Based on regional comparison with a focus in East Africa, this rate is highly unfriendly to a business that operates in a growing economy like Kenya. Rwanda and Uganda charge 13 and 20 percent withholding tax respectively on betting revenue which are lower than Kenya’s 35%. Tanzania replaced corporate tax in the gaming industry with a 6% tax on revenue as an incentive to attract more players.
 

This rate of 35% on gross gaming revenue was effected by the Finance Act 2017. The treasury cabinet secretary had proposed a higher rate of 50% in the 2017 budget proposals. It can appear to have been a great relief but still remains a very harsh rate to a sector that is still growing. The need to curb social ills has been given as the main reason behind the high tax rates. The addictive nature of betting and socio-psychological impacts on the participants has also been fronted as a reason behind this attempt to discourage the surge of gaming and betting companies. However based on global best practice, taxation of the winners as opposed to the gaming companies is most effective.
 
The specific focus on the gaming industry can be termed as discriminatory since there are other industries whose products are addictive with dire social effects but taxed at standard rates. Alcoholic products for instance are said to have negative side effects on social, health and mental wellbeing of consumers but particular manufactures have never been picked on to pay high taxes and discourage production.
 
The current gaming tax regime may force investors to close operations in view of the reductions in margins coupled with the increased operational costs. A few weeks ago, Bradley Limited who ran the Pambazuka national lottery suspended operations in Kenya citing high taxes that made the business unsustainable. This is just an example of what is likely to happen in the near future if no intervention takes place on the ongoing outcry from betting companies.
 
The big concern however should be the multiplier effect of a hurting industry to the various inter linkages in existence with other players. With the fear and possibility of ultimate relocation to tax havens, supporting businesses to the gaming industry such as the mainstream media which benefit from the regular advertisements and  telecommunication companies are likely to hurt. Job losses will become unavoidable and the cycle of business economic unsustainability in the sector.
 
The gaming industry has services and products whose cost cannot be transferred to consumers. Industry players have to meet any expenses that arise from punitive taxation policies and laws. The competition   is very stiff since there is lack of uniqueness in services offered. As a result, the Government should not overlook the impact of perceived decimation of the gaming industry to potential investors. There are some people wary of making future investments here with the fear of sudden rules and legislations that can cripple their business.
The solution to this outcry and crisis lies with the Government and stakeholders. Though the stakeholders have repetitively showed their interest in having discussions on the tax rates, the Government has showed some laxity on the matter.
 
Tax analysts have proposed that the 35% should be final tax as is the case with rental income. To compliment this, the Government can also introduce a withholding tax on payments made to betting winners so that participants also help in mitigating the tax burden. Alternatively, the 35% tax rate on revenue can be reduced by half and propose gaming industries to pay corporation taxes at the rate of non-residents, which is 37.5% and cushion the economy from the bigger loss of crippling the sector. This will reduce the high tax burden on the companies and at the same time provide room for Government to get more revenue. Taxing the companies highly without extending the same to winners is counterproductive and punishes the wrong target in the crack down.