Today, the Nigerian government unveiled the 21 sectors which will enjoy “pioneer status” as it works to accelerate investment into the country, and subsequently diversify the economy from minerals and hydrocarbons. One of those sectors is ecommerce.
The government of Nigeria has released the full list of the 27 key industries and products included in the ‘pioneer status’ incentives for prospective investors.The benefits include tax relief, mainly for corporate income tax. … Here is the full list of the 27 industries to enjoy the pioneer status….21. E-commerce services;
Nigeria’s corporate income tax (CIT) has averaged 30% over the last few years.
Resident companies are liable to CIT on their worldwide income while non-residents are subject to CIT on their Nigeria-source income.
The CIT rate is 30%, assessed on a preceding year basis (i.e. tax is charged on profits for the accounting year ending in the year preceding assessment).
Simply, CIT is 30% and it is a huge part of the profit. If you are not required to pay this money, the implication is that, you can decide to pass the gain to your customers. This will help the Nigerian ecommerce sector if they decide to pass the gain to customers.
Why This Matters
Just like that, the Nigerian government has made shopping online cheaper. The savings here could be up to 30% of profit provided the ecommerce companies decide to pass the whole gains to customers. This means that if a shoe commands a profit of N1,000, without the pioneer status, an ecommerce company can now sell it for N700 without any material change in its bottom line. This is because the difference of N300 would have been sent to government as tax, without the pioneer status in place. But since government is forgiving that tax, the online seller can sell at N700 without any change in its financials. This assumes that the seller is transferring all the benefits to the buyer.
Depending on how government implements this, selling things online should be cheaper in Nigeria for companies. This mirrors the U.S. model which helped Amazon.com. The ecommerce giant was not collecting local taxes thereby making things artificially cheaper to buyers compared to physical stores which do collect local taxes. So if a product is $100, and the local tax is 7%, buying at Amazon will command only $100 while in the local store, the price will be $107. For Amazon Prime members, the shipping is waived, and that immediately pushes many to shop online as they can save the tax money. That gave online stores a huge edge over their physical store counterparts across America. (By law, the local buyers are expected to self-report the tax; that does not usually happen though).
According to federal law, a retailer does not have to charge sales tax on purchases made in a state where it does not have a presence. And thus the argument has been that online-only retailers — which have only distribution centers instead of a massive fleet of stores dotting every state in the country — have enjoyed an advantage over their brick-and-mortar counterparts because they could effectively beat them on price by not having to charge that tax.
Technically, we should be seeing items cheaper in Konga and Jumia compared to physical stores and supermarkets once the pioneer status kicks off. While the challenges of ecommerce remain, in Nigeria, I will not go there today. This is a moment because this is a significant deal.
The Nigerian ecommerce players will have more room to profitability now they can keep all their profits if they choose. (This assumes they make profits.) Also, depending on how they plan it, online shoppers will increasingly see products to be more price-competitive compared to brick and mortar stores. As the government rolls out the modalities, more insights will come. This could possibly open more investments in ecommerce sector in Nigeria.---