Nigeria’s digital economy faces new challenge
Nigeria's Federal Inland Revenue Service (FIRS) plans to tax all online purchases on naira-denominated cards beginning next year.
The revenue authority wants to include the digital economy in projections to diversify its revenue stream for the coming year’s budget, says FIRS’ boss Babatunde Fowler.
- “We will tell the banks that, going forward, everyone who gives instructions for service for purchase online, they should deduct five per cent VAT,” according to Fowler in an interview with the Premium Times newspaper.
Nigeria has been desperate to raise its tax revenue amidst fluctuating oil prices, and rising debt levels. Africa’s largest economy has a low tax to GDP ratio at 6.1%.
- Last month, the Nigerian Stock Exchange reintroduced a 5% VAT for all transactions on the floor of the platform. This decision comes after a 2012 announcement, by the then finance minister Ngozi Okonjo-Iweala, to eliminate VAT on stock market transaction fees to attract investment. Two years later, the decision was implemented.
- In January, FIRS said it was considering increasing VAT on all transactions, beyond the digital economy.
- In April, FIRS announced plans to automate VAT collection from transactions in the lottery and gaming industry, hoping to plug loopholes in remittances.
- In 2017, Nigeria’s revenue service launched a tax amnesty scheme to encourage defaulters to pay up. FIRS claims the Voluntary Assets and Declaration Scheme (VAIDS) amassed ₦17bn ($46.8m) in the first six months.
The new FIRS policy seems to be in direct conflict with the cashless policy of the Central Bank of Nigeria (CBN). Over the last decade, more middle-class Nigerians are shopping online, and paying with cash or card. A card payment tax could hamper CBN’s efforts to gradually phase out direct cash transactions.
Nigerian technology firms are attracting global attention and funding.
- Critics say the tax will cripple the sector.
“The tech industry is one of the few bright lights in Nigeria in the last 10 years or so. Our government (states and federal) must come up with policies and actions that will aid and support them to grow, not just taxing them. It’s not hard to help them,” wrote Member of Parliament and businessman, Akin Alabi on his twitter page.
Trying to copy the US system of 5% online sales tax is WRONG. We only try to copy when it’s about squeezing revenue from entrepreneurs. We don’t copy when it comes to helping them grow.
— Oloye Akin Alabi (@akinalabi) August 5, 2019
Bottom Line: Nigeria’s tax authority is facing a careful balancing act. It needs to raise tax revenue to invest in the country’s development. But imposing exorbitant taxes threatens to chase away customers from cashless transactions, and undo the progress made in banking the unbanked.