A few weeks ago, a report revealing plans by the Federal Inland Revenue Service (FIRS) to begin charging 5% value-added tax (VAT) on online transactions by early 2020, was published by Premium Times.
The report quoted FIRS Executive Chairman, Tunde Fowler saying that the tax agency plans to appoint banks as agents to ensure that a 5% VAT is charged on all online purchases and remitted to FIRS.
This stirred up quite a conversation online, with many Nigerians interpreting it to mean that the FIRS wants to impose a new tax on Nigerians and they raised concerns regarding its implications on the nation’s digital economy.
However, according to the Nigerian law, the FIRS is well in its right to enforce VAT payment on all purchases; both offline and online.
In order to get a clearer view of the FIRS’ intention to impose VAT on online transactions, Techpoint recently sat down for a chat with Tunde Fowler, Executive Chairman of FIRS. In this interview, he explains why and how the tax agency wants to implement its plans.
Can you shed some light on the VAT charges on online transactions you recently announced?
To start with, paying VAT on online transactions for items that are VATable is the law. It is your civic responsibility to do so. Also, it will increase the revenue of state governments including your own state of residence. VAT is certainly something that is required, as it is the fastest growing tax type worldwide.
Though VAT is based on consumption, general items such as education and healthcare products and services are VAT exempt because those are the main things everybody requires. The needy will not pay VAT on these products and services, the rich will equally not pay VAT on them.
Right now, VAT is not inclusive on most online transactions. I have not seen any local online store that charges VAT on purchases and you cannot assume that items bought are VAT inclusive.
Clearly, by all taxing authorities, if you’re paying tax on any purchase, it should be stated on your receipt alongside the price of the product. Currently, there is nothing because we’re not paying.
And that is against the law and against good faith when conducting business. It is even unfair business practice because they will be able to sell their products cheaper than the next person. So apart from not obeying the tax laws, they are given an unfair advantage over their competitors.
If I buy something from an online store abroad with my local debit card, they will most likely charge VAT. Am I expected to pay 5% VAT to the Nigerian government after I have already paid VAT to the foreign merchant?
As a tax agency, we are mandated to cover just our country. We can’t talk about what happens in other countries.
But if you reside here, have your business here, and you make a purchase outside the shores of this country, you’re expected to pay VAT. Whether the invoice from that foreign merchant includes VAT in its bill to you or not.
Isn’t that at a risk of double taxation?
Different countries have different laws and every country is sovereign. For example, for a reformed tax jurisdiction area like England, when you buy something there and you export it, you don’t pay VAT.
That’s why when you’re leaving London or wherever, you can claim your VAT back. But there are countries where whether or not you export, you will pay VAT. An example is Nigeria.
Let’s say you’re in the tech industry and you get somebody from outside the country to help you maintain your systems remotely.
After they finish the job, they send you a bill of €10,000 and you pay it. You are supposed to pay 5% VAT to the Nigerian government on that service.
You mentioned that you plan to appoint banks as agents to automatically deduct VAT, how do you intend going about it?
Very easily. We’re at liberty to appoint people or organisations to be our agents to collect VAT. You might ask if it is fair to the banks. But being a former banker, I can tell you that it is.
Banks rely on cheap float to make money so as they are collecting VAT on our behalf, they’ll have an average float which they will also utilise in the normal course of doing business.
How do you think they will be able to pull it off?
It’s very simple, if you give your bank an instruction to remit ₦100,000 to buy a phone for you, all the bank has to do is to remit the money to the person you’re buying from and charge 5% of that amount as VAT which will be remitted to FIRS.
Since some products and services are VATable and some VAT exempt, how do you think bank systems will be able to tell the differences between these two categories and charge VAT accordingly in real time?
We will re-educate the banks. They also pay VAT so they know what is VATable and what is VAT exempt. For example, if you want to pay your children’s school fees, 90% of the time, you go through the bank.
Similarly, if you want to buy a capital item like a car, you also go through the bank. So the bank knows that paying for school is VAT exempt and paying for an automobile is VATable.
Considering the fact that getting the process right clearly requires a lot of technical know-how, is the timeline for early next year achievable?
That is our target. We’re not talking about software innovation, we’re talking about appointing the banks as agents to collect VAT.
To us, it is very simple. Since they can also identify what is taxable against what isn’t, we’re just asking them to take it to the next step where they’re carrying out payment instructions and adding 5% to VATable transactions. That’s all.
All they need to do is to tweak each transaction to fit what is VATable and what is not. Isn’t that relatively simple? Well, I’m not a computer guru but I believe that it is something that can be done.
For the tech people, the challenge is yours. You can make money by coming up with easy solutions, the banks will pay you for it. And if we need to support the banks, we may help them pay for it.
But like I mentioned earlier, the float that they’ll keep while carrying out that service should be more than sufficient because they remit on the 21st of each month. So if they collect VAT worth ₦500 million, they can invest that money for one month before they remit to FIRS.
Don’t you think this may pose a big logistical challenge, even for FIRS?
It cannot be. Let me put it to you this way, if a mistake is made, for example, you can always apply for a refund.
Anytime something is done by the government, they look at the overall outcome on the general good. If a policy is for the large majority then government does it. Revenue is for the common good of the large majority.
So maybe 0.01% will have an issue or be charged where they should not be charged, but they have an avenue to get a refund. So nobody loses out. But in everything that we do, there is a challenge. But one cannot just say because it’s a challenge, we’ll not do it.
Even without us putting this in place, people need to understand the tax laws. When you’re not charged VAT on something you bought online, nothing stops you from walking into the bank and paying VAT on it yourself as a good citizen.
But if you don’t do it, we’ll ask agents or people in that chain to assist us to collect it.
Why is it important for FIRS to crack down on collecting taxes, especially VAT?
People talk about exceptional cases, but I talk to people the way I understand the importance of paying tax. Fact, about 10 years ago or thereabout when I was still the chairman of the Lagos State Board of Internal Revenue, Nigeria had the highest rate of infant mortality (children aged 5 years and below) due to malaria, in the world.
At that time, we had a conference in Lagos and as usual, we went around to see what taxpayers money was being used for. We visited a hospital run by Lagos state and the issue came up. According to the nurse who we talked to, many parents do not have ₦2000 to buy malaria medicine for their children.
They would rather use that ₦2000 to eat and hope the fever will break. Some will even use traditional herbs and hope that the fever will go. But by the time the fever refuses to break and they get the children to the hospital, it is already irreversible. That was the first time I learnt that at certain levels, there’s no more treatment for malaria, especially for children.
So the issue here is that ₦2000 can save the life of a child under five. That’s why we need to get everyone involved to pay taxes, even if it is ₦2500 a year. Assume that the ₦2500 is for malaria treatment for one child.
From our own records, we have at least 25 million adults still not in the tax net; they are still not paying 1 kobo of tax and some of them are millionaires. If those 25 million people pay ₦2500, they will be saving the lives of 25 million children. So that’s the way we should look at it.
It is an uphill task but we’re starting with the high and mighty. We’re starting with those that have an annual banking turnover of at least ₦100 million and above, and are not paying taxes.
Some of them are supposed to pay monthly but in one year, they’ll not pay 1 kobo. The next year, they pay three times like it’s a choice. But they’re making money within this same society.