By Winnie Kamau
In a recent report released by VIFFA Consult dubbed Analyzing The Impact of the Finance Bill 2024 on MSE Growth in Kenya, the bill is expected to be a beacon of hope for digital entrepreneurs.
According to the Viffa report, the essence of this bill lies in its amendment designed to transform the digital economy by offering significant tax incentives for start-ups that invest in digital marketplace platforms. Although this proposed amendment has not yet been officially referenced in the Finance Bill, it is expected to be crucial in promoting innovation, and economic growth, and ensuring a level playing field for all businesses.
The Proposed Amendment
The amendment suggests an addition to the Second Schedule of the Income Tax Act, which currently caters to traditional capital investments like factories and machinery. The recommendation is for start-ups to claim an investment allowance of 50% of the cost incurred in building digital marketplace platforms in the first year of use. This move seeks to equate the heavy investments in technology infrastructure and software development with those in traditional manufacturing facilities.
Rationale Behind the Amendment
The rationale is clear: developing and operationalizing a digital marketplace platform demands significant capital outlay. Just as manufacturers need factories to produce goods, digital entrepreneurs require robust technology infrastructure to facilitate online commerce. By recognizing these expenses as qualifying capital expenditures, the amendment aims to provide essential financial support to start-ups, encouraging their growth and innovation.
Encouraging Digital Innovation
One of the primary justifications for this amendment is its potential to spur digital innovation. Start-ups, often grappling with substantial initial costs and limited revenue streams, will greatly benefit from this financial relief. The investment allowance will reduce their tax burden, allowing them to reinvest more into their businesses, thus driving technological advancements and fostering a culture of innovation within Kenya’s digital sector.
Economic Growth and Employment
The proposed amendment is part of a broader strategy to stimulate economic growth and create employment. The Finance Bill 2024 also proposes the removal of excise duty on goods and services produced within the East African Community (EAC). This dual approach aims to create a more favorable business environment, promote local production, enhance regional trade, and increase digital literacy. The resulting economic inclusivity and job creation are expected to significantly boost Kenya’s economy.
Level Playing Field
In today’s rapidly evolving economy, it’s crucial for the tax system to adapt and reflect contemporary business realities. The proposed amendment aims to create a level playing field between traditional and digital businesses. By acknowledging the substantial investments required to build digital platforms, the tax code will ensure that digital enterprises receive support similar to that of their traditional counterparts. This parity is essential for fostering a fair and competitive business environment where both types of businesses can thrive.
Proposed Amendment Text
According to Viffa to formalize this support, the amendment suggests altering Section 1(1) of the Second Schedule of the Income Tax Act to include digital marketplace platforms. The proposed text is straightforward: “Digital Marketplace Platform Development by an eligible start-up company: 50% in the first year of use.” This inclusion will classify the development costs of digital platforms as qualifying capital expenditures, thereby extending the benefits of the investment allowance to digital businesses.
As Kenya positions itself at the forefront of the digital revolution, the proposed amendment in the Financial Bill 2024 represents a significant policy shift. By providing targeted tax incentives to digital entrepreneurs, the bill aims to catalyze the growth of the digital economy, spur innovation, and ensure economic inclusivity. For start-ups in Nairobi and beyond, this amendment could be the key to unlocking unprecedented opportunities and driving Kenya towards a prosperous digital future.
Winnie Kamau is the President of the Association of Freelance Journalists, Kenya.
