Tax expert explains rationale behind proposed 5% VAT on online purchases

Nigeria's tax system
  • FIRS plans to introduce 5% VAT on online purchases.
  • Nigerians describes policy as anti-people and amount to double taxation.
  • Tax expert at KPMG explains what 5% VAT is all about and why Nigerians should prepare for it.

This week, Nigerians lamented the government’s proposed 5% value-added tax on all online purchases from 2020.

They described the policy as anti-people, saying it will amount to double taxation. Others noted that e-commerce platforms and many tech startups are still struggling to make profits and need pro-business policies that will support their sector.

To get a better understanding of the government's policy and its plans to bring the burgeoning digital sector into the tax net, Business Insider SSA spoke to Adewale Ajayi, Partner, Tax Regulatory & People Services at KPMG.

Excerpt from the interview:

Business Insider SSA (BISSA): What is your view on charging VAT for online purchases?

Adewale Ajayi: Currently, the supply of goods and services attracts VAT at 5%. Therefore, when a Nigerian buys an item from a Nigerian-based e-commerce platform (such as Jumia or Konga), the Nigerian buyer will pay a 5% VAT. However, when the same Nigerian buys an item from Amazon or similar e-commerce platforms that are not Nigerian based, the customer does not pay Nigerian VAT. In this case, the Nigerian buyer on Amazon would have escaped paying the VAT simply because the e-commerce platform is not based in Nigeria. However, this is wrong as VAT is a consumption tax and it is the final consumer (the Nigerian purchaser) that should have paid the VAT. This is the issue that the FIRS is trying to address.

While it is easy to have a Jumia or Konga charge and collect the VAT, it is difficult to get Amazon to do the same as it does not have any physical presence in the country. The issue, therefore, has always been how to collect VAT on such items bought by Nigerians on Amazon and similar platforms. So, what the FIRS is proposing is that Nigerian banks will be appointed as agents for this purpose. However, this will only be effective where Nigerian bank cards are used for the payment. The issue that will still need to be resolved is how to collect such tax from a Nigerian buyer on Amazon and similar platforms if the card being used is not issued in Nigeria. This is one area that the FIRS is yet to address. They may need to use moral suasion in the meantime to do this. However, the only effective solution will be to issue a directive appointing them as agents of collection.

BISSA: How will Nigeria’s digital economy be impacted?

Ajayi: The proposed solution will only create a level playing field in respect of items bought on Nigerian-based e-commerce platforms and other platforms like Amazon. It should, therefore, make the goods and services supplied by Nigerian e-commerce companies to be competitive. Taxation is about equity and transparency.  

It also means that government revenue should increase significantly. It should be noted that many countries have adopted their own rules in respect of the taxation of the digital economy. In France, for example, a 3% tax is imposed on every digital sale generated in France, subject to certain conditions such as the quantum of the worldwide gross revenue and France-based revenue of the technology company. In Nigeria, FIRS is only focused on VAT. They are yet to address the income tax implications of the revenue generated by those technology companies in Nigeria. Currently, such companies are not paying income tax on the revenue generated from Nigeria. However, it must be acknowledged that such practice is consistent with Nigerian tax laws. It is not a tax evasion scheme. However, Nigeria will need to amend its income tax laws to capture the tax on such revenue as other countries are doing.

BISSA: What does this mean for Nigerians that shop online?

Ajayi: It is simple: such purchaser should be prepared to pay VAT on purchases on e-commerce platforms, whether based in or outside Nigeria. 

The interview has been lightly edited and condensed for clarity.


Eyewitness? Submit your stories now via social or: