Crypto exchanges in Kenya have been exempted from the Digital Asset Tax (DAT) that was introduced under the 2023 Finance Act. Initially set at 3% on revenue generated from cryptocurrency trading and other digital assets, this tax took effect in September 2023. However, on Wednesday, the Kenyan Court of Appeal declared the tax unconstitutional.
The DAT targeted major crypto exchanges such as Binance and Coinbase, requiring them to remit the taxes within five working days and submit a tax return that included details on deductions and other necessary information.
According to an anonymous executive in the crypto industry who spoke to TechCabal, none of the local cryptocurrency exchanges had paid the taxes to the Kenya Revenue Authority (KRA) prior to the court’s ruling. The companies had, however, received notices demanding payment of the tax just weeks before the bill was declared illegal.
The DAT was intended to generate revenue from Kenya’s burgeoning digital asset market, which is second only to Nigeria in Africa in terms of crypto-related activities. Over 350,000 Kenyans had registered for the Worldcoin cryptocurrency project before its operations were suspended in August 2023.
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Some experts believe that a tax based on the transaction gains or income, taking into account potential costs and losses, would have been more appropriate for the volatile nature of cryptocurrencies. An executive from the Blockchain Association of Kenya (BAK) noted that in September 2023, BAK had taken legal action to block the new crypto taxes, though this case is now moot following the court’s ruling.
Other crypto industry professionals suggested that the Kenyan government could have set the DAT rate to align more closely with the existing 1.5% Digital Service Tax (DST), which was introduced in the 2020 Finance Act. The DST imposes a 1.5% tax on income from online marketplace services within Kenya.
The court also recognized that the short deadline for tax remittance under DAT was burdensome, increasing compliance costs for taxpayers.
The ruling was made by three Court of Appeal judges who concluded that sections of the 2023 Finance Bill that amended the Income Tax Act, Value Added Tax Act, Excise Duty Act, Retirement Benefits Act, and Export Processing Zones Act were unconstitutional. Their decision was based on the lack of fresh public participation during the legislative process.
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