Kenya’s introduction of a minimum business income tax of 1% on January 1st could have a devastating impact on the innovation economy, according to an executive in the tech sector.
Thanks to innovations such as mobile money, Kenya has one of the most advanced tech scenes among Africa’s celebrated ‘Silicon Savannah’ tech hubs.
In the past, ICT firms flocked to Nairobi where policymakers made a push for startups to thrive by reducing regulatory hurdles, but the new tax could temper exuberance for the sector.
Daniel Yu, CEO and founder of Sokowatch, an e-commerce startup that supplies informal shopkeepers with goods, argues that it will push low-margin high-volume businesses like his into loss-making models.
E-commerce business models like Amazon, which took years to reach profitability, require heavy investments in infrastructure and logistics with very small initial returns, he says.
For example, big e-commerce companies like Sokowatch or Jumia might only be able to recuperate $1 from every $100 spent.
If further taxes are claimed by the government, then these types of long-term transformative companies will no longer be viable.
This could have a huge impact on Kenya’s status as a startup destination in Africa, Yu says.
“If you are an investor, are you going to back the next e-commerce giant in Africa in Kenya if you know that the initial cost of doing business is likely to run into the hundreds of thousands and millions of dollars before your business in this market will get profitable?” he says.
Companies like Sokowatch, an online supplier of goods to micro retailers, make a sizable contribution to the government budget by bringing thousands of informal shopkeepers to the attention of tax authorities and paying corporation taxes and VAT.
“It’s short-sighted,” he says. “With this anti-innovation policy in place, the authorities are likely to drive away revenue in the long term where they would otherwise be collecting if they didn’t have this policy in place.”
The government should introduce exemptions for early-stage companies which are not yet profitable rather than using the tax as a “blunt instrument” on all businesses regardless of size, he says.
The Kenya Revenue Authority (KRA) says the purpose of the tax is encouraging equity and fairness in the tax system.
“The reality is that unfortunately, we have very similar conversations with regulators in other markets where authorities just don’t understand how you can have a loss-making business. They don’t understand the notion of investing and building out for long-term value. They think it is some kind of scheme or nefarious activity,” says Yu.
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