Sun. Jun 9th, 2024

E-commerce: Confronting challenges of taxation in an evolving Nigerian market
E-commerce: Confronting challenges of taxation in an evolving Nigerian market

By Racheal Ishaya

With Nigeria’s economy facing increased pressures as a result of dwindling earnings from her main revenue source – crude oil exports, government’s attention appears to have shifted to alternative revenue sources.

With the Federal Government considering imposing 5 per cent tax on all online purchases from next year, experts have raised concerns about the likely challenges the issue might provoke.

Coupled with the expanding ICT market and its increasing contribution to the overall gross domestic product, it appears here is no going back on the proposed tax policy come the year 2020.

The ICT sector is described by many as the future world’s crude oil. The National Bureau of Statistics (NBS) says the sector accounts for as much as 12.4 per cent of Nigeria’s gross domestic product.

With Nigeria’s population at about 196 million, internet users in the country rank 7th in the world. Reports say the popularity of social media in Nigeria follows the speed of mobile penetration in the economy.

In 2018, about 22.4 million Nigerians (about 11.2 per cent of the population) were active Facebook users monthly, with those patronizing the Twitter following closely with 8.35 per cent. Pinterest ranked third with 7.08 percent, followed by YouTube.

The growth of the social media platform presents a huge market for exchange of goods and services online.

The rapid growth in ICT has opened opportunities and new ways of doing business. Today, a sizeable portion of businesses are transacted with various mobile platform and online payment systems called e-commerce.

Online commerce and financial technology in Nigeria is strengthened by a fast-growing population, expanding consumer power, and increased smartphone penetration.

The management consulting firm, McKinsey says Nigeria’s eCommerce spend is currently estimated at over $12 billion. It is projected to reach about $75 billion in revenues per annum by 2025.

The e-commerce story in Nigeria started during the early part of the 21st century. Its development has been on a steady rise.

This has encouraged the Central Bank of Nigeria adopt a cashless policy with one of its aims being to encourage more electronic-based transactions, in terms of payments for goods, services, transfers, etc).

Nowadays, businesses and transactions can be finalized without any physical contact between the manufacturer and the final consumer, especially with the advent of platforms like Amazon, E-bay, Konga, Jumia, AliExpress and others.

At this time that government is looking for alternative ways to mobilise revenue to support the dwindling oil earnings, proposals have gone out for the government to consider the taxation of all online transactions as one veritable area to focus on.

But, whilst there are numerous benefits of e-commerce, a paradigm shift from a physical to an ‘invisible’ business framework, comes with its challenges, particularly on tracking transactions for taxation purposes of.

This is a potential avenue for loss of returns payable to an economy and interestingly, the challenges posed by the digital economy to tax authorities are not peculiar to Nigeria.

Many countries in Europe face similar challenges and are also looking at the best approach to tackle the challenges to tax collections.

At the recent meeting of the African Tax Administration Forum, the Executive Secretary, Logan Wort, said e-commerce has changed the distribution of taxable activities.

Wort said the development poses serious challenges in determining the jurisdiction to tax income and alters the balance of taxing authority, resulting in the erosion of countries’ tax bases.
The Executive Secretary said e-commerce creates difficulties in the identification and location of the taxpayer.

He said the identification and verification of taxable transactions and the ability to establish a link between taxpayers and their taxable transactions have been made even more difficult, thus creating opportunities for tax avoidance.

“The execution of these transactions requires no or minimal human intervention. It, therefore, follows that the taxation of cross-border digital transactions should preferably be done electronically and with minimal human intervention,” he said.

Besides, he said a withholding tax mechanism by financial institutions through the implementation of a real-time (RT)-VAT system, offers this possibility,” he added.

The Chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, hinted recently that the FIRS would soon begin the collection of value added tax (VAT) on online transactions by next year.

According to Mr Fowler, the FIRS plans to start directing banks in Nigeria to impose 5 percent VAT on all online transactions and purchases of goods and services.

“All those who make payments for purchases online will soon be made for VAT. We will tell banks, going forward, everyone who gives instructions for a service or a purchase online, they should deduct five percent VAT.

“Though VAT is based on consumption, general items such as education and healthcare products and services are VAT exempt because those are the main things everybody requires. The needy will not pay VAT on these products and services, the rich will equally not pay VAT on them.

“Right now, VAT is not inclusive on most online transactions. I have not seen any local online store that charges VAT on purchases and you cannot assume that items bought are VAT inclusive.

“Clearly, by all taxing authorities, if you’re paying tax on any purchase, it should be stated on your receipt alongside the price of the product. Currently, there is nothing like this on online transactions because we’re not paying.

“That is against the law and against good faith when conducting business. It is even unfair business practice because they (online stores) will be able to sell their products cheaper than the next person. So apart from not obeying the tax laws, they are given an unfair advantage over their competitors,” Mr Fowler said.

A Tax Expert, Patricia Auta, said directing banks to impose VAT on online transactions would impose additional obligations of monitoring and tracking various e-commerce transactions on banks.

She said this could also expose the banks to tax audit risks, as the FIRS would seek to ensure compliance and proper remittances of the VAT collections.

More so, Mrs Auta said a collection of VAT on such transactions by banks could amount to double taxation.

In her view, since the supplier of the goods and service has already charged and remitted VAT on the same transactions, given that the VAT Act imposes the obligation to charge and remit VAT on the supplier of VATable goods and services, it will amount to double taxation for the buyer to also be charged VAT.

“Another critical issue is how the banks are expected to determine VATable transactions and the mode of calculating and imposing VAT on the goods and services supplied online.

“The law allows a supplier of goods and services to make the necessary adjustments between the output VAT and input VAT before computing the VAT on the product supplied. As such, it would be absurd to mandate banks to make arbitrary deductions on the basis of output VAT”

Industry watchers say while it is desirable for the FIRS to expand the tax base in order to capture defaulting taxpayers, it is also necessary for the FIRS to keep proper records of online transactions and exercise reasonable caution in the VAT collection process to avoid imposing the double tax on already compliant taxpayers.

In all, while it is tempting to assume the time is not ripe enough to mobilise resources to confront tax leakages from the digital economy, the increasing number of business transactions that are consummated over digital platforms show that e-commerce is the future of business interactions, therefore should be properly taxed. (END)

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