Are we tightening the noose on the wrong rope?
By Stanley Maina
When I began writing this article, the main concern was the directive issued by the Government of Kenya on 1st July 2019 to suspend licenses of betting firms as it sought compliance with industry participants. As of 1st October 2019, two companies; Betin and SportPesa had announced their departure from the Kenyan market. This raises an interesting paradox of equity, equality, and justice in the way the government has handled the participants in the industry. Is there a balance of the interests of the concerned parties namely: civilians, government, punters and betting companies?
In the last decade, a phenomenal transformation of the industry has taken place, witnessed by a shift from traditional gambling to online platforms. The contemporary betting involves websites and online casinos where velocity and volume of transactions have recorded exponential growth. This may be attributable to an increase in smartphone usage amongst the youth.
Research on betting in Kenya found that the country has had a spike in the number of youth in Sub-Saharan Africa (SSA), which the Interior Secretary, Dr. Fred Matiang’i stated was at 500,000. A 2017 GeoPoll study observed that gambling was becoming popular particularly among males due to their high affinity towards sports and technology, combined with the proliferation of local sports betting players and the convenience of the mobile phone as a tool for gambling.
The new model of betting involves registration and participation of the punters online and is more efficient to run compared to traditional casinos.
The Kenya Revenue Authority estimated that the sector was earning up to KShs 200 billion per annum but only KShs 4billion was remitted as taxes. The data from Kenya gambling regulator Betting Control and Licensing Board (BCLB), however, shows that gross gambling revenue for the 2016/2017 financial year was Kshs 20billion ($200mn). Gross gambling is the amount of money that betting firms report after making payouts to punters. To place this in a different context, research by Reelforge Kenya shows that four of the top ten advertisers in Kenya are gambling firms with two of them occupying the top 2 spots.
What impact has betting had on the country?
First, there has been the creation of employment: over four thousand Kenyans are direct employees. Considering the ripple effect, these people create jobs in their estates and households. With the announcement of the closures of two betting firms that command 60% of the market share, it has been reported that 2,500 households will be affected by the imminent job losses.
When it comes to the social impact of the betting industry, major betting houses invest in sports promotion and other social activities to encourage sporting amongst the youth. The donations made signify the role a company plays in society apart from revenue creation.
I take cognizance of the fact that the youth are majority players in the betting industry. When Betting Control and Licensing Board (BCLB) suspended MPesa Paybill numbers of 25 firms, it was estimated that 12 million accounts were affected. This means that there are over 12 million punters in the market. According to the Kenya National Bureau of Statistics 2018 data, 7 million Kenyans are unemployed and out of this 1.4 million have been desperately looking for work. This survey found that the highest proportion (40%) of the low-income gambling consumer is unemployed, and a third (29%) are students.
It is the duty of the government to regulate and act in the public’s interest. The betting craze in the country is affecting the youth. Nonetheless, the solution to a lifestyle externality lies in understanding why.
Why is youth betting? Are we betting to get rich quickly, or are we betting to escape poverty?
The answer is that the majority are desperate to win the jackpot and escape poverty. It is important for the government to understand that most people are betting because they lack an alternative livelihood. Unemployed people are more likely to gamble vis-a-vis working citizens. This is the reason why the majority of betting accounts are owned by college students and jobless youth.
Globally, tax jurisdictions have used the Pigovian tax methods when taxing the betting industry. The nature of this tax is to discourage the negative externalities associated thereof. The industry has benefited the government via the following taxes Corporation tax, Withholding tax, Betting tax and Excise duty.
- Corporate tax: Betting companies are subject to Corporation Tax at 30% on the profits,
- Withholding tax on winnings at a rate of 20% of the payout.
- Pay As You Earn: Firms that are employers of a sizeable workforce are obliged by Section 37 of the Income Tax Act to remit taxes on behalf of their employees,
- Betting tax on the gross gaming revenue (GGR) of a bookmaker at the rate of 15% as provided by Section 29A of the Betting, Lotteries & Gaming Act, 1966. Gross gaming revenue means gross turnover less than the amount paid out to the customers as winnings. The bookmaker remits 15% of the GGR to KRA on the 20th of every month.
- Excise duty: Finance bill 2019 proposes to impose a 10% tax on betting stakes placed by punters.
Tightening the rope on punters and firms who engage in betting via Pigovian taxes: withholding taxes, corporate taxes and excise taxes only generates government revenue. It would be prudent for the government to proceed in moderation because opting for stringent regulations will only result in negative outcomes. The firms have opted to close down their operations. This is in no way a positive outcome. It also does little to address the WHY above. It is more likely to encourage illegal betting and underground betting casinos and sites as punters seek to enjoy more profits to escape government interference.
What direction should the government have taken in regulating this industry that would have ensured a win for everyone?
Stanley Maina is an Advisor at Andersen, Kenya:
Andersen, Kenya is a member firm of Andersen Global. Andersen Global is an international association of legally separate, independent member firms comprised of tax and legal professionals around the world. Established in 2013 by U.S. member firm Andersen Tax LLC, Andersen Global now has nearly 4,500 professionals worldwide and a presence in over 144 locations through its member firms and collaborating firms.