There is a popular Biblical saying which states that “Give unto Caesar what belongs to Caesar.” This was a time when the Roman empire headed by Julius Caeser had conquered Israel and the Israelites were supposed to pay taxes to their new overlords. The saying essentially means that one should always pay their fair share of taxes to the Government because it is what it relies on to render services such as healthcare, education, infrastructural development among others to its citizens.
In as much as it is an obligation for us to pay our taxes, the government needs to strike a balance which promotes both economic growth and innovation. However, in a sad turn of events we are increasingly seeing the government focusing more on raising taxes without considering the detrimental effects on the Kenyan fintech sector.
Essentially, a rise in the taxes charged on these startups has the ability of both stifling innovation as people will not be willing to invest in an unprofitable venture as well killing off the ones which are already in operation. A good example of this is when Pesapal was slapped with a Ksh. 233 Million tax demand by KRA after being wrongly classified as a software company rather than a financial services provider who is regulated by the Central Bank of Kenya.
Here are some of the ways in which unfair taxation can hinder innovation in the Kenyan fintech sector.
Reduced Investment
When high tax rates are charged on startups and fintech companies, they impose a significant burden on them given the fact that they most often than not have limited resources. So, when a significant portion of their revenue goes towards paying taxes, it reduces the funds which are available for research and development as well as investment in innovative solutions which can help the company grow. This discourages entrepreneurs from investing in this sector while at the same time stifling growth of the existing businesses.
Uncertain Business Environment
When running a business, it is important to have a stable and predictable business environment to promote growth. However, frequent changes or uncertainties in the tax laws and regulations can prove to be detrimental to a business. This is because in such a situation, it becomes challenging for a business to plan its operations effectively. Leading to reduced investment and a reluctance to take risks which means slower growth of the companies and a reduction in the taxes remitted.
Unexpected Costs
Frequent changes in the tax laws means that at one point or another a business will be found not to be compliant by the taxman. When a business is found not to be compliant, what usually follows is fines and penalties are levied on such a company. More often than not, these fines are extremely high and could have the effect of slowing down the growth of the company or even leading to its closure.
Lack of tax incentives
Fintechs just like other startups require some tax incentives such as tax breaks that can encourage innovation in the fintech sector. In a situation where these incentives are lacking, it reduces the motivation of these companies to invest innovative technologies and processes. This is because they often require substantial investment in R&D to develop new products, improve existing ones and implement new technologies.