How will the Finance Act affect the digital creative sector?

These include supporting the expansion of the country’s fiber optic infrastructure to ensure universal broadband availability and digitization, as well as automating all critical government processes to provide greater convenience for Kenyans.

The focus on the digital superhighway and the creative economy provides the context for the development of internet connections. The Economic Survey 2024 indicates a strong correlation between the number of wireless Internet subscriptions and undersea bandwidth capacity.

Total wireless internet subscriptions increased from 39.2 million in 2019 to 51.3 million in 2023, while undersea bandwidth capacity increased from 6.2 million megabytes per second (MBPS) to 17.2 million MBPS in 2023

This increase in internet bandwidth and data subscriptions confirms the government’s focus on the country’s fiber-optic infrastructure as a strategic initiative to drive economic growth.

A cursory look at the Fiscal Policy Statement 2024 provides insight into what the government intends to do in the digital economy and creative industries space. Some of the planned investments include installing 6,700 kilometers of fiber optic cables, providing internet connectivity to 42,697 public institutions, installing 15,000 Wi-Fi hotspots, upgrading the Kenya Information Agency and the Government Advertising Agency, to name a few.

Tax is a key factor enabling or discouraging the growth of this sector. The Finance Bill 2024 contains some proposals that will have a direct impact on this sector. One of the proposals of the Finance Bill 2024 is to expand the definition of monetization of digital content. Currently, monetization of digital content is subject to a 30 percent tax, and the recipient of such services is required to collect a five percent withholding tax as an advance payment.

Taking into account the rapidly growing digital content creation industry, the draft bill proposes extending this definition to include creative works and the creation and sharing of digital content.

The proposed introduction of a telecommunications relief for spectrum reservation is a positive move. Most media houses invest in spectrum licenses to enable them to broadcast content. Investments of this type are significant and media houses do not benefit from tax breaks for these investments.

This means that such entities pay tax on the lost tax relief resulting from the capital deduction. Thanks to this proposal, entities investing in spectrum permits can obtain a full deduction of their capital expenditure over a 10-year period.

There are other proposals in the bill that will have a negative impact on the digital highway and creative industries. In terms of excise tax, the draft law proposes to increase the excise tax rate on Internet data transmission services from 15 to 20 percent. This proposal comes only a year after the excise tax rate on the same services was reduced from 20%. up to 15 percent

It is also proposed to abolish the relief for internet service providers who purchase the Internet wholesale for sale to end consumers. Currently, Internet service providers can deduct excise tax incurred when purchasing mass Internet. This will increase internet costs and potentially make some ISPs uncompetitive.

Another proposal that may have a negative impact on this sector is the proposed introduction of an ecological fee on items used in this sector. Examples include broadcasting equipment for broadcasting, which is offered at Sh98 per unit, and equipment such as decoders, which are offered at Sh1,275 per unit.

The excise tax proposals may result in an increase in the prices of internet services, which is a key factor in the creative economy space. This may result in reduced demand for internet services. Perhaps more important is the uncertainty that the proposed changes will have for the sector.

As excise tax rates change, it may be difficult for businesses and the creative economy to properly plan the costs and investments needed to stimulate the growth of their businesses.

Moreover, the increase in prices of items such as set-top boxes as a result of the introduction of the environmental fee may weaken the government’s efforts to develop digital media.

Building on the Finance Bill proposals outlined above, the government should adopt an integrated approach in intervening in the digital highways and creative economy space with a view to increasing investment, reducing costs and providing greater opportunities for Kenyans to express their creativity. This will go a long way in realizing the dream of creating jobs for our youth.

Solomon Kihang’a is a Senior Tax Manager at KPMG Advisory Services Limited ((email protected)). The views and opinions are those of the author and do not necessarily reflect the views and opinions of KPMG.