What’s Digital Tax and Why is Government Reducing It

The government, through Finance Cabinet Secretary John Mbadi, has announced a significant reduction in the Digital Service Tax (DST) in the new budget estimates for the upcoming financial year.

Speaking at Daystar University, CS Mbadi revealed that the tax will be slashed by half, from the current 3% to 1.5%.

“Digital tax will be reduced from 3 percent to 1.5 percent in the new budget. The argument from players in the digital space has been that they are largely small business people, hence the need for uniformity. Also, to enhance compliance, which in turn enhances revenue collection,” Mbadi stated.

Understanding the Digital Service Tax

According to the Kenya Revenue Authority (KRA), the Digital Service Tax is levied on income derived from services offered through a digital marketplace in Kenya.

It applies to revenues earned by companies providing digital services or operating online platforms within the country, even if they do not have a physical presence locally.

The DST, which is separate from Value Added Tax (VAT), is charged on the gross transactional value and targets non-resident digital service providers without a permanent establishment in Kenya.

Examples of online service providers likely to benefit from the reduction include Jumia for e-commerce, Netflix for streaming services, and Spotify for music, all of which operate online without a physical presence in Kenya.

Boosting Compliance and Revenue Collection

CS Mbadi stressed that the reduction is part of a broader strategy to increase tax compliance within the digital economy.

“We believe that with the digital tax coming down, we are likely to collect even more taxes,” he noted, adding that the move is also intended to create a more equitable playing field for local digital service providers.

Background and Financial Implications

The Digital Service Tax was initially introduced to ensure that foreign digital companies contribute to Kenya’s economy, just as local businesses do, especially as more economic activities shift to online platforms.

For the 2025/26 financial year, the government has proposed a budget of Ksh4.3 trillion, with a revenue target of Ksh3.386 trillion.

The reduction in DST is expected to encourage more businesses in the digital sector to pay taxes, potentially increasing overall revenue collection despite the lower tax rate.