Online VAT: Where Nigerian Government Got It Wrong

Online VAT: Where Nigerian Government Got It Wrong

The proposed Value Added Tax (VAT) for online transactions has stirred frowning reactions from Nigerians. The chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, disclosed the decision of the Federal Government (FG) to introduce VAT to online transactions in an interview with Premium Times on August 1. But Nigerians are not buying the idea; they are saying that it’s just a measure by the FG to kill online businesses in the country.

At a time when digital transactions are being encouraged and Nigerians seem to be waking up to it, VAT is perceived as a threat to the cashless policy that even the federal government has been advocating. There are so many online outlets, most of them startups, leveraging on the VAT free online system.

The new policy billed to take effect next year does not apply to every item purchased online. Mr. Babtunde Fowler explained that items and services mostly used by people, like education and medical services will be excluded from the list. And the FG will be partnering with banks to effect VAT charges.

“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 said.

Despite the exclusion of some mostly used items from the list, Nigerians see the decision as discouragement to local online enterprises. And a viable reason why most of them wouldn’t be making online purchases anymore.

A Twitter user analyzed it this way:

“If you pay for an item worth N10, 000 with your card, you will need to give the federal government N500 extra. If the goods are worth 200, 000, you will pay the FG N10, 000. If you do 500, 000 transactions, that’s N25, 000 to the FG’s kitty. If your transaction is N10 million, you will pay the FG 500, 000.”

Another Twitter user added:

“With 5% VAT, usage of POS and other online payment options will reduce. People will start carrying loads of cash around for transactions which will trigger a sudden rise in robbery cases. The government just created an enabling environment for the ‘Armed robbery sector’ to thrive.”

With these sentiments, it’s obvious that Nigerians are unlikely to patronize online markets if this policy is implemented. And that’s going to impact negatively on online businesses. Even those who are deemed to be established, like Jumia and Konga and other retail stores that are counting on the cashless policy to thrive. Many of them will be laying off workers.

There are also developing payment platforms that will not survive this decision. Mr. Fowler tried to excuse the implications with further explanation, saying that the VAT payment is a thing of choice. According to him:

“What that means is, if A wants to impress B, and takes B to eat at the Transcorp Hilton, A will pay VAT for services enjoyed. This is because of the environment.

“The cost of Coca Cola they will drink at Transcorp Hilton at N1, 000 could have been bought at N100 in any supermarket without paying any VAT.

“Also, A can buy chicken, with all the ingredients in the markets, cook it and eat without any VAT. But instead of spending N5, 000 for that meal, if A decides to go to the Transcorp Hilton and spend N20, 000, then A must pay VAT. It is a choice A has to make.”

What is missing in this explanation is the fact that online VAT will not be exclusive to eateries alone. There are retail stores that sell at the same cost with conventional stores or even cheaper. And many people opt to online for convenience since most online stores do home delivery.

The “choice” emphasized by Mr. Fowler is highlighting the fact that the government has little or absolutely nothing to lose in this decision. The VAT tax is already implemented in offline businesses at 5%, and the International Monetary Fund (IMF) is even urging the FG to increase it to 7%. Mr. Fowler give further details on how extensive it has become, he said:

“We crossed the N1 trillion mark in VAT last year for the first time. We are equally improving this year. At the end of 2019, if we can have everybody under the tax net, sign for VAT, start remitting VAT, let’s look at the volume we can generate.”

The insinuation in this statement is that whether people choose to make purchases online or offline, the government is going to charge the 5% VAT, because it’s a win-win for them. And that is carefree if the online businesses survive or not. Since the VAT depends on buyers, the FG will have nothing to lose.

Apart from the UAE (United Arab Emirates) that recently introduced VAT at 5%, Nigeria has the lowest VAT rate in the world. But that does not justify its introduction to online purchases. Since the Nigerian environment lack the facilities that Entrepreneurs need to thrive, the online VAT waiver should substitute for the things lacking.

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