Ecommerce Sector to Shrink As Nigeria Begins Collecting 5% Online VAT Next Year

Ecommerce Sector to Shrink As Nigeria Begins Collecting 5% Online VAT Next Year

The Head of Nigeria’s tax agency has spoken: online 5% VAT is coming next year.  The Federal Inland Revenue Service (FIRS) Chairman, Tunde Fowler, was clear, “We are thinking that maybe early next year, we will advise banks to start deducting five percent VAT for all online purchases done locally.” Forget that “maybe”, this is a concluded matter; banks will hit you 5% for any transaction processed online via your Nigeria-issued debit/credit card.

“With the existing laws in Nigeria, we can appoint the banks as agents. First of all, all those who make payments for purchases online using bank cards and instruct their bankers to pay, we will tell the banks that, going forward, everyone who gives instructions for service for purchase online, they should deduct five per cent VAT,” he said.

“We are thinking that maybe early next year, we will advise banks to start deducting five percent VAT for all online purchases done locally,” he added.

This is good for Nigeria but would be challenging for digital companies and online-anchored fintech companies. People, why pay 5% more online when open markets (Alaba, Ariara, Kano) sell without collecting VAT from customers. Simply, 5% more will be a privilege to buy online in Nigeria!

But Nigeria needs this money, and we cannot afford the American experiment where they tactically “waived” collection of taxes by ecommerce companies like Amazon to help the then-nascent sector blossom. By not requiring them to collect sales taxes, buying online became artificially cheaper when compared with brick-and-mortar (physical) stores.

See it this way: if you shop in Best Buy, an electronic store chain, for a $1,000 laptop, you will be expected to pay extra $80 as sales tax in some states with 8% sales tax. But buying from Amazon, that tax is not collected and you just pay $1,000 for the same product. With Amazon free shipping and next day delivery, you have saved $80. 

Due to this, physical stores evolved into showrooms to many Americans. Yes, visit them to see the items and then buy online to save taxes. Of course, governments expect you to declare and pay that tax when filing your annual tax returns. Unfortunately, few people do that. As the online redesign accelerated, many physical stores started collapsing in America because they could not compete on price!

But U.S was fine until they got ecommerce to the level they needed.Today, that regulation has been updated and Amazon now collects sales taxes for governments in most jurisdictions.

Between the growth of the digital economy and more tax revenue, Nigeria is going for more money right away. The ecommerce market will shrink marginally once this is implemented. Most smaller ecommerce players will collapse because if you have money in Nigeria, the problem is never where to shop; paying extra 5% to wait may not work for many people!

The ecommerce sector will experience a minor slowdown as government begins implementing automatic and direct collection of VAT on online transactions in Nigeria. See it this way: if a physical open market sells electric iron for N8,000 and Jumia sells the same for N8,000, because Jumia’s customer will be required to pay VAT (5% of cost), the price will jump to N8,400. This extra N400 for online purchase will inflate the price against the open market which typically does not collect VAT. (In U.S., the reverse was the case: ecommerce firms were originally not required to collect taxes unlike physical stores even though the ecommerce companies expect customers to self-report during tax filing. The non collection of online taxes helped Amazon significantly when it started.)

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.

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11 thoughts on “Ecommerce Sector to Shrink As Nigeria Begins Collecting 5% Online VAT Next Year

  1. By FIRS head’s thinking, the banks will be querying every payment made via debit card, to know which of them is for ecommerce purchase? We also pay for energy bill and data bundle with debit cards, will they now have another 5% VAT? Not sure how it will play out yet.

    Normally there’s always a trade-off between government raking in more money (tax) on one hand and that of encouraging investment plus job creation on the other hand. But since Nigeria has remained the undisputed leader with respect to contradictions, it will always talk from both sides of its mouth.

    We are currently singing ‘financial inclusion’, mobile banking and all the niceties, but at the same time trying to make so many people to disappear from online activities; a super paradox!

    Trust Nigerians, once they evaluate the numbers from their bank accounts, even if it means returning to stone age, for cost saving sake, it will worth it.

    Good luck to FIRS.

    Reply
    1. Good analysis. Personally I feel that the market reach of ecommerce is too low to begin to apply Vat. Even internet reach that enables ecommerce is still poor. As it is, there is no single law in Nigeria to regulate ecommerce because we have not fully understood its dynamics. To hurriedly impose tax on something we haven’t fully understood and legislated is to put our desire to grab a share from the seeming high volume of transactions ahead of our thinking through. Also, the policy sounds like it wants to punish ecommerce patrons for their choice. It doesn’t sound right to me. I expect this will go to Court for testing.

      Reply
  2. I expect an ebusiness like Jumia to have already charged vat on the items sold online which would have been included in the prices of such items. If Nigerians are then charged vat on purchasing these same items online wouldn’t that lead to double taxation.

    Reply
    1. Companies charge VATs but few remit. The government has been fighting banks in court to remit VATs. The charging is never the issue, it is the remitting that is the problem. Govt thinks it can fix that problem this way

      Reply
      1. Why not then limit the enforcement of the this new VAT collection process on those companies who FIRS feels does not remit their VAT? Similar to how they demand banks to seize funds for taxes that hasn’t been paid?

        Reply
  3. Hi, first of all, thanks for taking the time to break down what was said and what you think is likely to happen on this topic!

    Would you please mind elaborate on your argument referencing the “American experiment”? Perhaps I misunderstood you but I fail to see how it is a valid argument as in their in case, Amazon had a clear advantage whereas in Nigeria it’s a leveled “VAT playing field” between online and offline. To the contrary, adding an additional VAT for online transactions would CREATE an uneven playing field.

    Logically, it must be a lot easier for FIRS to measure and determine VAT liability when transactions are conducted electronically and not with cash. This policy will likely push online customers towards cash-on-delivery and in other cases to simply buy through offline channels. Once more, I can only speculate here, but I’d assume online players with enough scale to have a meaningful impact on the sought after tax revenue gains would be far more likely to already be remitting their VAT than the offline counterparts Nigerian customers are likely to patronize instead…

    The proposal also stands in stark contrast to the cashless policy and instead of incentivizing local entrepreneurs and businesses to adopt and develop online distribution channels and capabilities that will help them compete in the increasingly globalized world of the 21st century, this move will only serve to stifle this much needed development and hold innovative Nigerian businesses back.

    At the end of your post you write: -“But Nigeria needs this, as a poor nation, and we cannot allow the privileged few to shop untaxed!” I believe this new policy would have the direct opposite effect as transactions will now increasingly be done in cash, from companies less likely to remit VAT and be harder to track, or am I wrong here?

    You also write: -“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.”
    The sector(s) that will be affected here in many cases represent what I believe would help drive Nigeria forward (e.g. fintech, e-commerce, cashless policy, etc.), investment from outside in Nigerian start-ups, building tech capabilities and expertise that will help Nigeria be competitive globally.

    How is this shortsightedness in any way good for Nigeria? If it was only about increasing tax revenues in the short term, I’m sure there would be so many other ways (that wouldn’t necessarily be wise either) that at least wouldn’t stifle important future growth sectors. What’s your take on that?

    Apologies for the lengthy message but it would be really interesting to hear your view on the above

    Thanks
    Philip

    Reply
    1. Your points are noted – the offline guys benefit since govt has been unable to collect taxes from them. But my point is that VAT collection is the LAW of the land. Unless that law is changed, FIRS has an obligation to use any legal mechanism to collect it. That it is easier to get it from ecommerce firms compared with open markets across Nigeria does not make the strategy wrong. If government does not want to collect VAT on ecomemerce, the national assembly should update the rule book. This should not be debatable. Anyone saying we should leave ecommerce firms from VAT obligation is saying Nigeria should abstain from enforcing its laws even when it has a low-hanging fruits. America changed the rule book to waive it for ecommerce firms like Amazon on sales tax collection. Nigeria has not done so: you do not expect the tax agency to do otherwise. That is my point – FIRS not doing it is failure in process because it cannot disarm on its mandate.

      Reply
  4. Interesting discussion.
    This position of the regulators is I’ll timed and I really don’t see it as an optimal one as it will stifle the growth of the digital e-economy. I also think the government and regulators need to really understand this rather thank rush in because of the percieved immediate gains at the expense of allowing the economy to form to the extent to be able to support the payment of this tax. After all, tge law allows for pioneer incentive by way of tax waivers and other grants so that when that sector or unit forms properly, the country will enjoy in the long term, income from it.
    Thank you.
    Macaulay

    Reply

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