According to a report published earlier this month by Premium Times, Nigeria’s Federal Inland Revenue Service (FIRS) plans to begin enforcing a new 5% VAT on online purchases of goods and services, starting “maybe” early next year. Investigations reveal that this is not entirely true.
The report gained a lot of coverage, especially on social media, with many Nigerians interpreting it to mean that the FIRS wants to impose a new tax on Nigerians.
They also raised concerns about its implications on the Central Bank of Nigeria (CBN)’s move to make Nigeria a cashless society, the issue of tax compliance, and good governance.
The funny thing is that this new 5% VAT policy from FIRS technically go against the CBN’s cashless.Advertisement
Anyway, if the FIRS have their way and implement the policy, it's to be withdrawing CASH in bulk and making offline payments
— Honourable Oke Umurhohwo (@OkeStalyf) August 6, 2019
So the FIRS will introduce a 5% VAT on every online transaction from 2020. Nigeria did not see other good things to assimilate only what seems to extort her citizens more of their already hard to earn money. More tax payers money to embezzled.
— Olabisi Dicta (@tomoriolabisi) August 7, 2019
Since online payments in Nigeria are often made through the use of debit and credit cards, the FIRS Chairman Tunde Fowler reportedly told Premium Times that it plans to appoint banks as agents to ensure that all VAT from online purchases are remitted.
According to Adedayo Alawode, a Lagos-based tax consultant, this is only a strategy by the tax authority to bring more people into the tax net.
“Many people, especially those who run online businesses, have been evading tax, mostly VAT. What FIRS is trying to do is to ensure that these people remit their VAT,” he explained during a recent interview with Techpoint.
This will not be the first time the FIRS is enlisting the help of commercial banks to enforce tax compliance. In August 2018, the government agency began writing letters to banks appointing them as tax agents and directing them to place a lien on the accounts of tax defaulters.
In February of this year, the tax authority directed the banks to suspend the lien for a period of 30 days. A few weeks after, the FIRS issued a public notice stating that the restriction would continue with effect from March 15, 2019.
“Majority of these cases were VAT-related,” says Adedayo.
Regardless of these measures, Nigeria still has a huge tax compliance problem.
Paying taxes in Nigeria
According to the Nigerian law, VAT should be charged on the purchase of all goods and services, except in the cases of those exempted or zero-rated by legislation; this should apply to offline and online purchases.
In an ideal situation, all VAT collected by businesses from all online and offline sales should be remitted to the tax authority. But the reality in Nigeria is that many individuals and businesses do not pay their taxes, let alone VAT.
As of 2017, only 14 million of the 70 million economically active Nigerians were paying taxes, with only 214 people reportedly paying taxes of more than ₦20 million in the entire country, according to former finance minister Kemi Adeosun.
In 2018, the number of tax compliant Nigerians reportedly rose from 14 million to 19 million following FIRS’ intensified drive for tax collection. Still, tax only contributes to a minute percentage of the country’s GDP year in, year out.
Taxing online transactions
The enforcement of VAT on online purchases has been difficult for many governments around the world, especially for cross-border online sales.
For so long the continuous growth of online shopping and transactions all over the world has led to VAT losses in the billions. The UK government lost an estimated £1 billion to £1.5 billion from 2016 to 2017.
In order to minimise these losses, governments around the world are coming up with policies that will enable them to capture all taxable sales and purchases. And they are mostly leaning towards putting VAT liabilities on online marketplaces.
In popular online marketplaces in Nigeria, VAT liability is on individual merchants and not on the platforms themselves. A quick look at the terms and conditions of popular eCommerce platforms Jumia and Konga explicitly tells us that much.
According to a merchant who sells on both platforms, even though he charges VAT on all products, he has never been obliged to remit them to FIRS; this is exactly what the government agency is looking to curtail.
However, the question of how the banks will pull off the automatic deduction of VAT on every local online purchase still remains. Perhaps, the recently launched consolidated tax database will play a huge role in making it happen.