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Taxes & Tariffs | |
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Wednesday,
September 04, 2019 /04:03PM / By Taiwo Oyedele* Tax
Partner, PwC Nigeria / Header Image Credit: PwC
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:
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.
About The
Author
Taiwo Oyedele is the Head of Tax and Corporate Advisory Services at PwC
Nigeria. He has been in the forefront as a thought leader and prominent speaker
on key accounting and tax issues including the tax implications of IFRS
Adoption and Transfer Pricing. Taiwo writes articles in leading national
newspapers, professional journals, international magazines and newsletters. He
is a regular presenter and a highly sought after public speaker delivering over
200 speeches and presentations around the world in the past 3 years alone.
Taiwo is the Head of PwC Tax Academy, Dean of the Direct Taxation Faculty of
the Chartered Institute of Taxation of Nigeria, member of the Nigerian Taxation
Standards Board and a member of the Taxation and Fiscal Policy Management
Faculty Board of ICAN. He can be reached vide @taiwoyedele
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