Report warns withholding tax risks pushing digital traders to informal platforms
Under the proposed law, online platforms would be required to withhold five per cent tax on sales by resident vendors.
Kenya’s plan to introduce a five per cent withholding tax on online sales may push thousands of small and medium enterprises (MSMEs) away from formal digital marketplaces and into unregulated spaces, a new report warns.
The "E-Commerce in Rural Kenya Report 2025" highlights that platforms like Jumia, which have formalised online retail and helped rural communities access goods and earn income, could lose sellers to social media platforms such as TikTok, WhatsApp, and Facebook.
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Industry experts caution that the tax, while intended to expand government revenue, could backfire by discouraging small online businesses from operating within formal channels.
“A key concern is the proposed Withholding Tax (WHT) on goods sold via digital marketplaces in the Tax Laws (Amendment) Bill 2024. While aimed at broadening the tax base, it risks unintended fallout,” the report notes.
Under the proposed law, online platforms would be required to withhold five per cent tax on sales by resident vendors.
This would add to the current 1.5 per cent Turnover Tax (TOT), further tightening the already limited margins for small businesses grappling with rising costs, inflation, and weak consumer demand.
The report warns that such a move could create an uneven business environment. “Applying WHT solely to compliant resident platforms creates an uneven playing field,” it states.
This could discourage local innovation and investment while non-resident platforms, which are not registered locally or do not follow consumer protection rules, benefit.
Unlike formal platforms, sellers on TikTok Shops, WhatsApp, and Facebook operate largely outside taxation, often anonymously, and provide limited protection to buyers.
Experts say that if the withholding tax is enforced without a flexible framework, many sellers are likely to shift to these informal spaces where authorities cannot easily monitor transactions.
Although Kenya’s e-commerce sector accounts for only 2-5 per cent of total retail, it has been expanding rapidly, particularly in rural areas.
Digital marketplaces have helped lower prices, improve access to goods, and provide new income opportunities.
However, the report cautions that the proposed tax could reverse these gains, giving informal platforms a competitive edge and undermining efforts to formalise digital trade.
The study urges policymakers to consider a differentiated approach that balances revenue generation with the growth of Kenya’s online economy, ensuring rural communities continue to benefit from digital trade without being driven into the informal market.
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