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Digital Service Tax: How Incoherent Regulation Turns Predatory

6 min read.

The inefficiencies that have dogged other sectors are finally in the digital space. The DST is a perverse re-distribution of resources that is manifestly predatory while retarding growth in the sector.

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Digital Service Tax: How Incoherent Regulation Turns Predatory
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A coherence check is an evaluation of the extent to which legal instruments such as the Digital Service Tax (DST) achieve their own stated objectives with efficacy, effectiveness and efficiency. As the economic slump bites and Kenya’s debtors start calling, the extent to which the Kenyan government is coherent in its regulation is directly linked to Kenya’s social and economic stability. While government regulation can be convoluted, the coherence check framework makes clear what the meaning of regulation is to you.

The DST, which came into effect on the 1st of January 2021, is a 1.5 per cent tax on the gross transaction value of all digital products and services in Kenya. The inexhaustible scope of products and services covered by this tax ranges from downloadable content to data analytics services.  Stripped down to its core regulatory intent, the DST is a transfer of wealth from private actors in the digital sector to the government. The short-run purpose of the DST is to grow the tax base while the long-run objective can be considered as to boost tax revenue. How coherent then, is a 1.5 per cent tax on digital products, services and marketplaces to its own objectives?

I meet Ndunge at her second-hand clothes stall in a busy part of the city, as I collect a piece. Since the first COVID-19 lockdown, she has had to create an account on a popular social media application to find new markets, ensure that she doesn’t lose her long-term clients and most importantly, to survive the slump in demand in her sector. Ndunge’s online clothing sales are technically subject to the DST. She dismisses my questions about the DST with “vile itakam” (whatever will be). Ndunge is required to submit DST returns by the 20th of each month but she will not be doing so. She is strikingly disengaged from a fiscal rule that is imbued with the potential to destroy a business she has painstakingly built. Our digital service provider explains that the government is not justified in its pursuit of 1.5 per cent of all her business, a view that she assures me is almost ubiquitous amongst her colleagues. The dismissive bitterness that frames her opinion of the government and its taxes is a sign that her political disillusionment is morphing into something altogether more sinister.

The DST is a transfer of wealth from private actors in the digital sector to the government.

At the philosophical level, Ndunge entered into a social contract with the Government of Kenya when she started her business. She wittingly or unwittingly expected to receive a public services bundle – political decision-making access and a voice in the distribution of the tax burden in exchange for her taxes. Her perceived imbalances in this transaction, coupled with the persistent allegations of corruption within government have created a legitimacy gap. Legitimacy is the key ingredient in the administration of tax or any coercive law. It motivates compliance, encourages group discipline in rule following and significantly reduces enforcement and monitoring costs for regulators. Without legitimacy, the incumbent government must use violence, legal or otherwise to achieve its compliance objectives, and I guess in Ndunge’s case, they will have to.

To violently compel Ndunge and the 86 per cent of Kenya’s informal sector workforce to comply with the DST, the government will undoubtedly need to invest significant resources in the requisite tax infrastructure to register, motivate and monitor compliance. As the DST is an experimental tax, even in jurisdictions with robust tax infrastructure and legitimacy, this significant public investment will have to be undertaken without a clear return on investment.

Based on the foregoing, the first question that arises about the DST is its efficacy. The decision to regulate must first be informed by the evaluation of how much coercive force is required to achieve the objective of a greater tax reach and an increase in tax revenue. As illustrated by the above, the government’s legitimacy gap, the required investment in tax infrastructure and the unclear return on investment raise questions on the feasibility of the DST. 

The DST is designed as a prescriptive rule by the Kenya Revenue Authority (KRA) that requires the regulatory target (digital products and service providers) to register and submit their monthly DST returns in compliance with the Finance Act 2020. However, a glaring design flaw is the DST’s blanket provision of 1.5 per cent of the transaction value for all digital business, without the differentiation of income/turnover thresholds. The KRA’s inability to prioritize regulatory targets or identify classes of digital services/products to earmark is, first and foremost, punitive to local micro, small and medium-sized (MSMEs) digital enterprises. Pitting the compliance capacity of multinational digital content providers against the limited resources of MSMEs is not only amoral, but it sabotage’s the KRA’s objectives.

With no clear regulatory priorities, the KRA is faced with a system capacity overload, where regulatory resources are spread too thinly to successfully target, motivate and monitor compliance. The natural, resulting equilibrium is the committed non-compliance of MSMEs, the bedrock of Kenya’s economy and the main regulatory target. Simply put, there is no incentive for a middling Kenyan lifestyle blogger with no technical capacity to calculate and engage with the regulatory requirements of the DST and comply. Moreover, the expectation that it should cost the same amount for the blogger as for Netflix is preposterous. The DST here is demonstrably ineffective in the pursuit of its own objectives.

In addition to alienating the core tax revenue-generating actors in this jurisdiction, the DST is bound to have a “chilling effect” on the sector. First, in the short term, there is loss of consumer welfare as those digital actors who can transfer the cost of the DST to consumers, have and will. The more perverse effect of the DST however, is the loss of the “silicon savannah”, the unregulated space of digital innovation, with global recognition and ramifications.

Pitting the compliance capacity of multinational digital content providers against the limited resources of MSMEs is not only amoral, but it sabotage’s the KRA’s objectives.

There is a sickening but almost comforting familiarity to the ruination of exceptional things, people and spaces in this country. The sequence is clear: A new and disruptive idea, technology, market or product is created and the novelty is exploited by those most disenfranchised to create capital. The now productive sector catches the attention of the government, which directs its monopoly power to regulate. Gradually, the inefficiencies of “the Kenyan experience” emerge while incentives to innovate, grow and create are strangled. The capital previously owned and generated by the innovators, finds its way back to the political class and the sector withers, the status quo is maintained. This unfortunately is how “the cookie crumbles” in the digital products/services sector – the inefficiencies that have dogged other sectors are finally in the digital space. The distributive injustice of the DST to the youth, MSMEs and other disenfranchised groups is only more compelling when viewed in light of the rampant distortionary effects of corruption in this jurisdiction. In effect, this tax is a perverse re-distribution of resources from the most efficient interest group – disenfranchised private sector actors – to the government. The DST is in this case manifestly predatory while retarding growth in the sector.

As a policy analyst, I wonder what the strategic regulatory intent of the DST was when considering its cost/benefit spread. While the benefits of the DST accrue to the government, digital financial services providers are beneficiaries by exemption. It is noteworthy that digital financial service providers are the primary beneficiaries of a previously unregulated digital sector. Digital financial services providers developed their products in a regulatory vacuum and created the economies of scale that now allow them to compete internationally. As the most profitable economic entities in Kenya and possibly in the East-African Community, why should they be exempt from the DST?  The economic rationale of this exemption is unclear as these financial service providers are experiencing profit gluts after recouping their digital infrastructure investments. Unmistakable interest group politics are at play here, bringing into question the regulatory intent of this tax.

The more perverse effect of the DST however, is the loss of the “silicon savannah”, the unregulated space of digital innovation, with global recognition and ramifications.

A coherence check on the Digital Services Tax illustrates the inefficacy, ineffectiveness and inefficiency of its intent, design and effects.  I find that the government’s legitimacy gap is likely to promote committed non-compliance among the regulatory targets. Therefore, in order for the KRA to achieve its regulatory targets, it must employ legal violence. Additionally, the DST’s blanket provision is a limiting design feature that discourages compliance, creates perverse incentives and retards growth and innovation in the sector. These distorted outcomes all ensure that the fervent attempts by the KRA to substantively increase tax reach, fail. Finally, the exemption of digital financial service providers from the scope of the DST is indicative of interest group politics in the sector that are destructive to growth and innovation.

Given the adverse effects of the DST, MSMEs and other interested stakeholders in the sector need to confront the rising tide of incoherent regulation by urgently organizing and engaging with the regulatory process. The recent increase in internet taxes (Finance Act 2021) is an indication that the government will not relent in its redistributive efforts. Digital service providers must form a clearly defined interest group because only by pre-emptive engagement with the Ministry of Information, Communication and Technology on its policies, positions and instruments can they have the analytical and relational capacity to insulate themselves from predation, in line with their contemporaries in the digital financial services sector.

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Maryanne Nduati is a policy analyst and the creator of the Coherence CheckTM Framework. With over 10 years’ experience in policy analysis, her main aim is to make the meaning and effect of legal instruments clear for civic education and organized action.

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Defend the Freedom of the Press

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Defend the Freedom of the Press
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We, The Elephant, stand with our fellow journalists against the attacks meted during the coverage of the recent demonstrations. An independent, impartial, and objective media is a pillar of our democracy and crucial to both the state, the opposition, and the wider public. Freedom of the press is a non-negotiable.

Going by recent events, we are quickly sliding down a precarious path as regards freedom of the press. The spike in disinformation, influence peddling, hostility and attacks blurs the ability for the media sector to deliver, timely, critical and credible information necessary to help the public make informed decisions and hold meaningful conversations.

We are also particularly concerned by the targeting of specific media persons, media institutions, international journalists, and media industry practitioners.

In March 2023 alone, we have witnessed at least 45 reported cases of attacks, theft, harassment, and arrests by both sponsored state and non-state actors with some of the journalists affected suffering direct attacks and bodily harm.

The genesis of these attacks can be linked to the publication of the photos and issuance of summons by the Directorate of Criminal Investigations (DCI) linked to the demonstrations on the 20th of March. The publication on the state agencies social media platforms was an exercise in error that included false, misleading and misconstrued claims against participants in the demonstration.

The unintended outcome has been the formulation, and instrumental-ization of hostility and violence against members of the 4th estate. So far we have witnessed the targeting of reporters, videographers, freelance practitioners, and photographers by police, hooligans, hired goons, and looters who’re kin to cause mayhem and evade justice.

Journalists as chroniclers of societal events, scribes of the evolution of political demands, and recorders of the unwarranted, gross violations, have a solemn duty to inform the public on matters of public interest. They therefore ought to be accorded their respect in time, their place in the political contestations as neutral arbiters, and respected as repositories of current and historical memories.

We urge our colleagues while out in the field to prioritize their safety, assess the risk factors, coordinate with their newsrooms, and the law enforcers, and review media ethics and the legal ramifications in the course of their work during demonstrations.

We urge freelance journalists to coordinate, liaise, and embed with their colleagues for safety purposes. We also urge for urgent investigations into the theft, assault and detainment of journalists, and call for speedy prosecution of the perpetrators.  We also ask for refrain by public figures from spotlighting specific media persons and media houses, and ask aggrieved parties against media persons and institutions, to channel their complaints through the respective legal channels as provided by law.

The Elephant Desk

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Addressing the Information Disorder: Building Collaboration

In deploying measures to address the information disorder, the trend is towards the establishment of multi-stakeholder collaboratives.

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Addressing the Information Disorder: Building Collaboration
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In a recent article, I discussed the need to address the information disorder (defined as mis- and disinformation) through collaborative multi-stakeholder collectives such as Fumbua Kenya. In this article, I take the next step of envisioning the ideal composition for such collectives. However, before doing so, I briefly explore other similar collectives with a view to drawing lessons on building collaboration.

A tried and tested concept? 

For several years now, numerous stakeholders have attempted to address the information disorder in different ways such as fact-checking and conducting media literacy trainings. These solutions were often used in isolation. More recently, stakeholders recognized the importance of collaboration in deploying measures to address the information disorder. As a result, there has been a growing trend towards the establishment of multi-stakeholder collaboratives to address the information disorder as it relates to issues such as the pandemic or democratic processes such as elections.

Collaborative efforts have largely been dominated by media practitioners. For example, in Brazil, during the 2018 elections, a collective of journalists drawn from twenty-four different local media companies was established to debunk rumours, fabricated content, and manipulative content aimed at influencing the polls. This collective is known as Comprova. In the same year, a similar collective was established in Mexico with the same mandate. It was known as Verificado. A year later, Uruguay followed suit and established a collective under the same name. However, Uruguay’s iteration of Verificado broke the mould by incorporating academics, universities, and civil society professionals. With the examples of Brazil, Mexico, and Uruguay, Argentina was able to pull together a collective of more than 100 news organizations under the Re-Verso banner. Much like Uruguay, Argentina’s Re-Verso took the collaboration further by including other disciplines such as forensic scientists who were able to assist the journalists in fact-checking audio messages.

With the experiences of these collectives, recent multi-stakeholder collectives have become increasingly diverse in their composition. For example, the BBC recently launched the Trusted News Initiative which brings together journalists, social media platforms and technology companies, and researchers. The mandate of the Trusted News Initiative is to increase media literacy, develop early warning systems, engage in voter education, and provide a platform for stakeholders to share lessons. Similarly, the Credibility Coalition, which is comprised of researchers, journalists, academics, policymakers, and technologists, aims to foster collaboration around developing common standards for information credibility. One of Fumbua’s members—Meedan—is also a member of the Credibility Coalition.

When these collectives were initially established, they were primarily driven by the recognition of the importance of collaborative journalism, and the need to reach broader audiences. As a result, their composition was heavily biased towards the media. However, subsequent iterations recognized the importance of broadening the pool of collaboration to factor in other disciplines. Some have articulated this importance explicitly. For example, Nordis, a consortium of researchers and fact-checkers funded by the EU Commission, explains that the diversity in their composition is aimed at developing new insights, technological solutions, recommendations for journalistic practice and tools educators can use. Perhaps most importantly, they hope to have concrete policy recommendations for legislators.

Extrapolating the basics 

Based on the examples of multi-stakeholder collectives around the world, one can discern common trends. For one, most collectives seem to be centred around journalistic practice and as such are dominated by media organizations. While there has been a recognition of the role played by other stakeholders such as academic researchers and cognitive scientists, their involvement has not been as robust and deliberate. These collectives also often crop up in response to a major socio-political/socio-economic event such as an election, and this influences their composition and activity.

Most collectives seem to be centred around journalistic practice and as such are dominated by media organizations.

Fumbua has largely conformed to these trends, being comprised of a large number of media organizations, and having been established to address the information disorder around the 2022 general election in Kenya. However, Fumbua’s experience is unique in several ways. For one, Fumbua included a pre-bunking initiative which was the first of its kind in Kenya—StopReflectVerify. Fumbua also relied on social media personalities and performing artists to repurpose some of the core messages developed by the journalists within their collectives. The use of multimedia content enabled the collective to engage audiences in ways that align with the nature of information consumption on social media. Perhaps most crucially, Fumbua was able to use its network to engage with policymakers and regulators to attempt to impact public policy.

One size does not fit all

When one considers the experience of the diverse collectives around the world, it is clear that each iteration was significantly influenced by several factors which were unique to each situation. From the social issue the collective was designed to respond to, to the available resources and organizations willing to participate, it is clear that one cannot define, in absolute terms, what these collectives should look like.

However, what remains clear is the importance of such collectives being intentional about defining the scope of collaboration, the role of each member, and how each member’s activities will feed into the larger collective’s work. In building collaboration, such collectives should also be mindful of the information value chain in their ecosystem. For example, in Kenya, one would be remiss to exclude vernacular radio stations which remain a consequential player in the media ecosystem.

The diversity of these collectives should be informed by the unique issues they are responding to. Fumbua for example was able to engage a large cross-section of its audiences in a way that was familiar to them by deliberately including stakeholders at all levels of the media ecosystem and supporting these stakeholders by amplifying their content and helping them repurpose it. However, at a broader level, these collectives should be designed around changing how the populace interacts with and consumes information. It no longer suffices to raise awareness around the existence of the information disorder, or to flag information as false or misleading. For this reason, these collectives ought to be focused on impacting how information systems are designed. This goal, considered in the context of the particular collectives, should then inform their composition.

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The Roots of Toxic Masculinity in South Africa

In South Africa and elsewhere, toxic masculinity is an outcome of modern individualism rather than tradition.

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The Roots of Toxic Masculinity in South Africa
Photo: Manenberg. Image credit Christopher Morgan via YWAM Orlando on Flickr CC BY 2.0.
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As I stepped into the nightly streets of Cape Town’s most dangerous neighborhoods, I sensed that my journey would be an initiation. The goal of my research project was to document the lasting impact of apartheid racism and gender inequalities on tough and street-smart men. Little did I know that I would make every effort to become invulnerable in my own kind of way, trying to prove my masculinity and academic prowess through ethnographic fieldwork.

Just like many of the men I met in South Africa, I was attempting to shed my vulnerability. However, it never fully worked, even for a privileged European white man like me. Ethnography is an art form rather than a science and it makes researchers vulnerable as they continuously affect and are affected by the research subjects. Moreover, the pressure I put on myself to produce something exceptional to gain respect and impress others took a toll on me.

The paradox of (in)vulnerability made both my research participants and I complicit, although on vastly different terms. For me, attempts to become an invulnerable individual with fixed gender identity led to relationship problems, substance abuse, irritability, and suicidal thoughts. The more I sought invulnerability, the more vulnerable I felt. This (in)vulnerability has received little attention in research, which often disregards the gendering of behavior or turns masculinity into both the cause and solution for a range of social, psychological, and medical problems.

Over the course of more than 10 years of research, I could feel the pulse of (in)vulnerability; the throbbing between disconnection and connectivity, rigidity and disorder, closure and openness. Perhaps this pulse is a fundamental aspect of life for everyone, regardless of social and cultural differences. But the struggle for invulnerability takes on different rhythms based on circumstances. I have been witness to the pain and struggles of the men I interviewed. Some committed suicide, others were murdered, had fatal accidents, or died from infectious disease before they reached their 40s.

Although I stayed in contact with some of these men, I retreated to my safe haven after completing my doctoral research. Writing my dissertation and book was draining, filled with anger and shame over my inability to support the people whose stories I documented, and my own shortcomings. I was not living up to the ideals of a compassionate human rights advocate or a productive academic who could be sharp, unyielding, and daring at all times. But the survivor’s guilt was just another manifestation of me believing that I could be an individual savior.

As I delved deeper into my research, I realized I had fallen into a well-worn pattern—a white European male traveling to Africa to prove his masculinity. It dawned on me, most of the behaviors that are associated with toxic masculinity are an outcome of modern individualism rather than tradition in South Africa and elsewhere. White men imported the gendered ideal of a self-made individual. The trope can be traced back to 17th-century English philosophers who defined the individual as the “owner of himself,”” who owes little to others, with a core identity composed of seamless traits, behaviors, and attitudes, rather than an assemblage of contradictory elements adopted through ongoing exchanges with others.

South African psychologist Kopano Ratele argues that well-meaning critiques of gender ideologies tend to homogenize and retribalize African masculinities as if they had no history. From this perspective, contemporary heteronormativity and male power are not necessarily a matter of “‘tradition”’ as a single and fixed structure. Yet, gender development work in Africa often uses the term “toxic masculinity” interchangeably with “traditional masculinity” particularly among low-income Black men.

During my doctoral research, I found that my own assumptions about the dark ages of patriarchy and their continuing effects on South Africans were based on a teleological model of progress that obscures how modern individualism creates toxic masculinity. My pursuit of invulnerability through ethnographic research was an attempt to “be somebody” in a world in which personhood is seemingly no longer defined by mutuality in relationships. For the most marginalized men I met in Cape Town, this pursuit was by far more distressing, in part, because these men were aware of the fact that they always depended on others for their very survival.

This post is from a partnership between Africa Is a Country and The Elephant. We will be publishing a series of posts from their site once a week.

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