Everyone knows that I am a fan of government doing everything legal to collect taxes in Nigeria. Yes, if you say you are “a big man or a big woman”, you must pay a big man or big woman tax. Last year, I was among those that went and asked the Ministry of Finance to do something on online tax. I contributed in the technical brief. Because nothing was evident, the most viable option was to ask banks to “withhold” VAT. Yes, if you like your Netflix, Amazon, Kohl’s, Jumia, Tekedia and indeed any online service, be open to pay VAT to the Nigerian people. Of course, I get the concern – “they will steal it through corruption”. That is unfortunate but that does not mean that you should not pay taxes to Nigeria.
The good news is that government has a date – January 2020 for the collection of online VAT: “The Federal Inland Revenue Service (FIRS) says it will begin to impose Value Added Tax (VAT) on online transactions, both domestic and international, from January 2020. The chairman of FIRS, Tunde Fowler, disclosed this … in Abuja.”
We have thrown it out to Nigerians. Effective from January 2020, we will ask banks to charge VAT on online transactions, both domestic and international.
VAT remains the cash cow in most African countries, with an average VAT-to-total tax revenue rate of 31 percent. This is higher than the Organisation for Economic Cooperation and Development’s average of 20 percent.
This statistics, therefore, is a validation of the need for us to streamline the administration of this tax with the full knowledge of its potential contributions to national budgets.
It is, however, also bearing in mind the rights of our taxpayers,
VAT revenue is shared 15 percent to the Federal Government, 50 percent to state governments and 35 percent to local governments.
FIRS wrote to all commercial banks in May 2018, requesting for a list of companies, partnerships and enterprises with a banking turnover of N1 billion and above.
This activity is aimed at ascertaining those companies that are compliant with the tax laws and those that are not,” he said.
Why does VAT contribute 51 percent to total tax revenue in Senegal but only 17 percent in Nigeria? Why is the ratio on VAT refunds at 49 percent in Zambia but only one percent in The Gambia?” Chairman Fowler
Do not worry that our march to the digital economy and unlocking new sectors like ecommerce can be affected by this. Sure, there is risk that open market and cash payment will rise in the nation. Yet, we need to understand that effective tax collection is a path Nigeria must take if it hopes to have a future as a modern economy. We need to support this redesign in the nation.
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Simply, ecommerce firms will lose many price sensitive customers, and some online payment fintechs may have to be concerned also. But Nigeria needs this, as a poor nation, and we cannot allow the privileged few to shop untaxed! I do not care about the sector-growth: whether it is online or offline, it is all commerce. We just have to grow while paying the taxes required to power Nigeria.
Ecommerce Sector to Shrink As Nigeria Begins Collecting 5% Online VAT Next Year
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Yes, I totally agree that the government must devise efficient ways to collect taxes including VAT, but unfortunately, given what we know about the modus operandi of the Online VAT, targeted at online businesses, this may be illegal and amount to double taxation.
I believe the online VAT will be implemented as a direct deduction either from the amount online platforms receive whenever payment is made or as an additional charge to the customer. This will mean that whoever is selling the product, the e-commerce site (for sites that hold inventory and sell) or the person selling on the site (for sites that act merely as platforms or marketspace), will not have the ability to factor input VAT (which is deductible from VAT charged to customers) in the amount payable.
Input VAT is the VAT paid to the supplier of an item (Section 12 (1) and (2) of the VAT Act). It is the 5% extra, you are charged on that invoice. Section 17 of the VAT Act allows you to deduct the VAT you are charged on goods you purchased for resale, or that form stock in trade or that are included directly in the production of a finished good you intend to sell.
E-commerce sites and sellers on e-commerce sites are basically retailers, with this proposed system of direct debit (I suppose), their inability to deduct input VAT will amount to double taxation on the input cost for the items sold. This will not be a 5% tax on their margin or the value added in the process of getting the finished good to the consumer (which is the reason for allowing deduction of input VAT), but the retailer suffers an extra cost of that input VAT as his own direct cost. This cost eats away the margin of the final retailer and it is a fixed cost, so smaller retailers who charge smaller margins suffer more tax per Naira made than those who get away with huge margins.
Also, the VAT act is clear on how VAT is assessed and paid (Sections 12 to 16 of the VAT Act). Taxable persons are meant to prepare returns monthly, stating their Ouput VAT (which is 5% of their gross income) and indicating any deductible Input VAT. If there is an excess of output VAT over input VAT, the excess is paid to FIRS, if the input VAT is higher, then the excess input VAT is carried forward or refunded by the FIRS. The FIRS has not spoken a word about how this will be handled.
I think this and a couple of actions come from a place where the FIRS sees itself as an authority, sometimes above the law, and not as an agent appointed to execute the law to the letter. This is why we have seen a couple of extra-judicial and illegal moves by the FIRS in a bid to generate internal revenue (like the placing on lien on taxpayers’ account without a court order).
We are a republic, bounded by a constitution, yes imperfect, but must be upheld. Any intellectual discourse within the realm of the law without consideration for this should not be entertained, and if the FIRS wants to carry out its duty, it should either do it according to the law, or start a discussion on changing that law.
Government will update the act and e-commerce firms will not be expected to return VAT. They list enough to cover margins and corporate tax knowing government will pick VAT from banks of customers. This is not hard for national Assembly to update