Nigeria: Tax 101 - How The Proposed VAT On Online Transactions Will Affect You

Last Updated: 5 September 2019
Article by Taiwo Oyedele

The Federal Inland Revenue (FIRS) said it will ask banks and other service providers involved in online payment settlement to collect VAT on online transactions effective from January 2020.

What is VAT?

VAT stands for Value Added Tax. It is the tax you pay when you buy things (goods) like food, phones, soaps, generators, cars etc or when you pay for a service (like transportation, phone airtime, cinema shows, sewing your cloth, making your hair, etc).

Don't let the name deceive you, there is VAT whether you think value has been added or not. The rate is 5%. This means for a price of N1,000 you will pay an extra N50 as VAT to government making your total bill N1,050. If the item is for your use or consumption then that is where the VAT story ends. But if you resell the item or use it to produce something else which you will sell at say N1,500 then you need to charge VAT of N75 so the buyer pays N1,575. Since you paid VAT of N50 (input VAT) when you bought the item then you are entitled to deduct it from the VAT of N75 you've just charged (output VAT) and only pay the difference of N25 (N75 - N50) to FIRS.

Some sellers already include VAT in their listed prices and will sort out the VAT element with government (we call this VAT inclusive price) like in the case of recharge cards.

Does that mean there is VAT on everything?

No. The VAT law has a list of goods and services that are not liable to VAT. Examples include educational materials like books, basic food items like raw yam, cassava, beans (once the food is cooked you may have to pay VAT), baby foods, fruits and vegetables, medical treatment, school education, etc. Also some transactions that are NOT subject to VAT because they don't qualify as goods or services. Examples include land, company shares, borrowing etc

Who should pay VAT?

The seller or service provider is required to charge VAT for the customer to pay. The law mandates any person who is selling goods or rendering services to register with FIRS and charge VAT on their sales. Failure to register or charge VAT attracts fines. In many countries a small business is exempted from charging VAT until it grows to a certain level (equivalents of about N13m sales in Ghana, N17m in Kenya and up to N23m in South Africa) but this is not the case in Nigeria.

Can I avoid VAT if I don't order anything online?

VAT applies equally to goods and services ordered online or offline. It does not matter whether you pay cash or through electronic means. We can classify online transactions into 4 categories:

  1. online sale of goods by local businesses (like buying a bag on Jumia)
  2. local services provided or ordered online (like Pay TV subscription to watch DSTV) - VAT is already being collected on categories 1 & 2 since the sellers are in Nigeria regardless of whether the transactions are done online or offline. If VAT is not being paid it is not an online problem, it is people choosing not to comply and FIRS not doing their job.
  3. online sale of goods by foreign sellers (like ordering a phone from Amazon) - On this category, VAT is already being collected by Customs at the point of importation except where the value of the item is small and legally exempt.
  4. foreign services provided or ordered online - The challenge for Nigeria is this category. Examples include when you subscribe to Netflix or you pay for an advert to promote your post on Facebook or Instagram.

Why should you care?

Government wants to ensure that online transactions don't escape VAT but as demonstrated above only category 4 is really an issue and it constitutes a small percentage of online transactions in Nigeria.

So the question is how will the proposed measure by the FIRS address this problem? How do we ensure that categories 1-3 don't suffer double VAT? If VAT is taken by the payment agent how will online sellers offset their input VAT? How will the payment agents know if a transaction is exempt from VAT so they don't charge VAT wrongly?

My two kobo

While it is necessary for government to do something regarding taxation of the digital economy, we need to consider the possible impacts including intended and unintended consequences.

Overall objective should be to ensure a level playing field between online and offline transactions, to prevent non-taxation as well as avoid double taxation or excessive compliance obligations. This becomes even more critical in the event of an increase in VAT rate as being proposed by government.

Nigeria should key into the ongoing global efforts to address the challenges of the digital economy in a collaborative manner given that the digital economy puzzle for us is really category 4 transactions involving foreign companies that are not within Nigeria's jurisdiction.

The future is online so government should encourage players in this space not scare them away. In fact online is easier to track for tax purposes because it leaves a trail, so one more reason to tread carefully or we may be warming up to score a spectacular own goal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions