Kenya’s government is taking steps to tax the digital music industry, setting up digital traps to capture revenue from virtual music platforms. The music sector, although holding immense potential, currently occupies a marginal position in Kenya’s economy, falling under the broader category of arts, entertainment, and recreation.
According to Kenya’s Economic Survey 2023, the arts, entertainment, and recreation segment contributed Kes28 million to the country’s GDP last year. However, signs of success are emerging as Kenyan artists leverage digital platforms to pursue Afrobeat and Amapiano genres. Consequently, the government is eager to tap into this potential source of revenue.
Tax advisory firm KPMG highlights that Kenya’s Finance Bill 2023 aims to bring digital content businesses under the tax net, as these ventures have experienced recent growth driven by creative individuals who have received limited government support. The bill proposes a definition for “digital content monetization,” encompassing electronic offerings of entertainment, social content, literary works, artwork, educational materials, and more.
Under this provision, any income derived from artistic works through website advertisements, social media, brand sponsorships, affiliate marketing, subscription services, merchandise sales, exclusive content membership plans, content licensing (including music, photographs, and user-generated projects), and crowdfunding for specific content goals would be subject to a 15 percent duty.
PwC, another tax advisory firm, points out that the proposed 15 percent withholding tax rate is higher than the usual rate of 5 percent applicable to other professional services. As a result, digital content creators could face an effective tax rate exceeding 30 percent, assuming a profit margin of 50 percent. PwC also notes the potential challenge of minors falling within the scope of these legal provisions, as some content creators are below the age of majority.
If approved, this tax measure would deal a significant blow to Kenya’s arts, entertainment, and creative sector, which is still recovering from the economic impact of the COVID-19 pandemic. While the music and entertainment industry rebounded in 2021 due to the easing of travel restrictions and increased attendance at clubs and concerts, it remains an untapped sector in Kenya’s economic landscape.
Despite its potential to provide employment opportunities for thousands of young people, the music industry in Kenya has received little attention from successive governments. However, private sector players have managed to provide fair incomes for workers in the sector.
As per the Kenya National Bureau of Statistics (KNBS), the estimated real average annual wage per worker in the arts, entertainment, and recreation sector was Kes663,301 in 2022, which was Kes54,359 lower than the pre-pandemic figure of Kes716,660 in 2019.
Comparatively, the real wage earnings in the arts, entertainment, and recreation sector outperformed sectors such as agriculture, forestry, and fishing, with workers earning Kes321,034 on average. The arts also surpassed mining and quarrying (Kes567,204), manufacturing (Kes497,225), and real estate activities (Kes272,987) in terms of wage earnings.
The sector also has the lowest number of unionized employees, indicating the relatively low prioritization of Kenyan musicians’ concerns in the country’s economic landscape.
In an attempt to revitalize the sector, the government has made sporadic efforts. In 2017, the Kenya Copyright Board (KECOBO) licensed the Music Producers Association of Kenya (MPAKE) to collect and distribute royalties on behalf of authors, composers, and publishers, following reports of alleged misappropriation of revenues meant for musicians.
At a recent event, President William Ruto expressed the desire to support the arts industry, emphasizing the government’s commitment to promoting arts as a contributor to national growth. He mentioned a flagship project under the Ministry of Sports, Arts, and Culture, which aims to revolutionize the organization of sports and arts in Kenya. Ruto highlighted the incorporation of performing arts into the curriculum to equip students with theoretical knowledge and practical skills in the arts.
Looking to other countries for inspiration, Ethiopia’s Jobs Creation Commission has identified the creative industries as a sector with high potential for job creation. The Ethiopian government has proposed various strategies to support music, film, fashion, photography, and fine arts, including reducing the tax burden on artists, establishing multipurpose physical spaces, ensuring artist protection, and developing an arts education curriculum.
Meanwhile, Kenya seems to be taking a different approach, seeking to impose taxes on the growing digital content market. The number of local content services providers (CSPs) in Kenya increased by 14 percent in 2022, reaching 682, compared to 598 in 2021. This expansion can be attributed to the rising popularity of digital content services such as streaming video, music, games, and e-books.
With an increasing number of Kenyans turning to online platforms for shopping and expanding their digital presence, the growth of the wireless internet and data subscriptions market has been significant. Last year, Kenya witnessed a rise in total wireless internet subscriptions, reaching 48 million, along with a 67.4 percent increase in terrestrial wireless data. Fixed internet subscriptions also grew by 24.5 percent, with a notable 34.5 percent increase in fixed fiber optic data subscriptions.
In conclusion, Kenya’s government is considering taxing the digital music industry, an emerging sector with significant growth potential. However, this approach could have adverse effects on the arts, entertainment, and creative sector, which is still recovering from the pandemic. While efforts have been made to address the challenges faced by musicians and artists, more comprehensive support is needed to unlock the economic potential of the music industry and provide fair remuneration for its workers.