Nigeria’s digital economy faces new challenge

By Eromo Egbejule

Posted on Friday, 9 August 2019 09:34
Digital betting shops are not the only ones threatened by a tax on online transactions REUTERS/Akintunde Akinleye

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%.

Technology tax

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.

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