How tax on online transactions may hamper e-payment success

As the Federal Inland Revenue Service (FIRS) sets to commence the imposition of value-added tax (VAT) on online transactions, both domestic and international, starting from January 2020, some stakeholders in the financial industry believe that the policy may hamper progress achieved so far in the nation’s e-commerce. MOTOLANI OSENI writes…

It is no longer news that Nigerians will from next year pay extra to shop online. Specifically, the tax is targeted at buyers who use cards as opposed to cash for transaction payments.

According to the FIRS boss, banks would be instructed to deduct five per cent Value Added Tax (VAT) from any buyer that wants to pay with the card.

The move to shore up the country’s revenue from e-commerce is, however, an antithesis to the cashless policy introduced by the Central Bank of Nigeria (CBN) about six years ago.

While the cashless policy is already gaining traction in the country with an increase in the use of the card for payments as opposed to cash, stakeholders say the new FIRS policy would reverse the gains of the last six years.

Announcing the plan to enforce the new tax from next year, the FIRS Chairman in a recent interview stated that the agency was extending VAT collections to online transactions as part of measures to meet revenue target.

Fowler further stated that the FIRS would rely on multiple sources of information to widen the tax net and effectively capture all VATable transactions.

Particularly targeting digital economy, Fowler said the country had been working on a solution to get the market captured. We will address the issue of the digitalised economy very soon.

There is no global solution to a digitalised economy. Different countries have taken different solutions to address the problem. Nigeria has not taken a position yet.

But, we are meeting to see if we can come up with a global solution that we can all adapt to,” he said in the interview.

On the five per cent e-commerce tax, the FIRS boss disclosed that deduction of the tax would be automated right at the point of payment, in conjunction with banks. “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.

The move has, however, sparked anger and condemnations among Nigerians who felt the government would be discouraging people from patronising e-commerce platforms through the policy.

Many believed most of the items sold on e-commerce, for instance, are tax inclusive and extra five per cent for card purchase online will amount to extortion.

A Nigerian lawmaker and businessman, Akin Alabi, said the government should come up with policies and actions that would support the digital space and not taxing them out of business.

“The tech industry is one of the few bright lights in Nigeria in the last 10 years or so. “Our government (states and federal) must come up with policies and actions that will aid and support them to grow, not just taxing them. It’s not hard to help them.

Trying to copy the US system of 5% online sales tax is wrong. We only try to copy when it’s about squeezing revenue from entrepreneurs. We don’t copy when it comes to helping them grow,” he said.

According to Chief Executive Officer of Aliens Media Limited, Mr Segun Awosanya, the introduction of the tax is another demonstration of policy somersaults that have characterized governance in Nigeria.

“How can you claim to be creating means to ease of doing business while you are bent on destroying a working cashless policy created by the previous administration? How can you continue imposing hardship on the people when you give nothing?

I believe the plan is to further tighten the noose around the neck of the people. Our adaptive nature of normalizing evil is being put to test. This madness only ends when the people decide to say enough in unity,” he said.

Condemning the policy, Nigerians on the social media app, Twitter, argued that directing the banks to impose VAT on online transactions could result in a number of unintended effects, as it appears to impose additional obligations of monitoring and tracking various e-commerce transactions on banks.

They added that this could also expose the banks to tax audit risks, as the FIRS would seek to ensure compliance and proper remitting of the VAT imposed.

“Collection of VAT on such transactions by banks could amount to double taxation where the supplier of the good/service has already charged and remitted VAT on same transactions given that the VAT Act imposes the obligation to charge and remit VAT on the supplier of VATable goods/services,” one Twitter user said.

Meanwhile, as part of the modus operandi of e-commerce platforms, there is room for the return of products paid for and full refund if a customer is not satisfied with the product after receiving it.

With the FIRS’ tax plan automated at point of sale, it means deductions will be done when payment is made. This means that customers may be paying taxes and losing money on products they have to return.

If implemented as planned stakeholders fear that the five per cent VAT is capable of hindering the country’s cashless policy. as customers would opt to pay cash by opting for Pay On Delivery anytime they shop online.

Industry analysts, however, noted that the government should be considering how to grant tax breaks to eCommerce firms such as Jumia and Konga whose operating costs are over the roof rather than planning to tax their customers, which cut across Nigeria.

Introduced in 2011, the cashless policy is the brainchild of the CBN that aims to reduce the amount of cash in circulation by encouraging more people to use point of sale (POS) terminals and online platforms for transactions.

Among other things, the policy was designed to reduce the cost of banking services and increase financial inclusion.

The impact of the policy has been evident in multiple ways. For instance, in 2012, the volume of POS transactions stood at 2.59 million, that figure grew four times to 9.42 million in 2013 (PDF).

By 2018, the volume of POS deals in Nigeria stood at 285 million. The value of POS transactions in 2018 was N2.3 trillion (PDF), rising from N400 million in 2012.

This number is set to rise by the end of this year, with statistics showing that over N1.4 trillion worth of transactions had been made so far in 2019.

The growth is largely due to the efforts of the CBN to open up the financial sector and the arrival of disruptive fintechs and other mobile services.

However, the FIRS’ proposed VAT could significantly affect the adoption of these services once its implementation begins in 2020.

Currently across sectors, the issue of multiple taxations is a major challenge and extending it to a market that is still at its infant stage may lead to a collapse of the market.

While it is understandable that the government needs more revenue from different sources, as the cost of services debts rise, it may have to rethink its decision on e-commerce and online payment, taking into cognisance the implications.

But Fowler in his recent explanation on the avenue for revenue generation acknowledged that many countries regard Nigeria as a good market are into online businesses, saying there is need to key into the potentials to generate more revenue.

He, however, said that the date of commencement of the VAT on online transactions would only be effective if the federal government approved.

“We have thrown it out to Nigerians. Effective from January 2020, we will ask banks to charge VAT on online transactions, both domestic and international”, Fowler said.

“VAT remains the cash cow in most African countries, with an average VAT-to-total tax revenue rate of 31 per cent. This is higher than the Organization for Economic Cooperation and Development’s average of 20 per cent.

“This statistics, therefore, is a validation of the need for us to streamline the administration of this tax with the full knowledge of its potential contributions to national budgets.

“It is, however, also, bear in mind the rights of our taxpayers”, he explained.

Citing Senegal as an example, the FIRS boss said Nigerian can make more from VAT collection as the West African country generates 51 per cent of its revenue from VAT while Nigeria generates 17 per cent.

He said the tax agency had notified banks in May 2018 requesting for a list of companies with a banking turnover of N1 billion and above to know the companies complying with tax laws.