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

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:

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. 

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 

Related News

1. N311.94bn Generated As VAT in Q2 2019 - NBS
2. FIRS Issues Final Demand Notice To Companies Whose Bank Accounts Are Under Lien
3. FIRS Public Notice On Deduction At Source of WHT And VAT On Compensation Paid By Principal Companies
4. NSE to Resumes Charging VAT on Commissions Applicable to Capital Market Transactions
5. Tax Tribunal Rules That A Taxpayer Can Object To A Defective Assessment Even If It Has Been Paid
6. Re-Introduction of VAT on Market Transaction Charges Take Effect From July 25th, 2019
7. Tariff Hikes and Rising Customs Revenue
8. Court of Appeal Affirms the Applicability of VAT on Services Rendered by a Non-Resident Company
9. TAT's judgement on Employer's Obligation to Remit Tax on Voluntary Pension contribution Withdrawals
10. Tax Appeal Tribunal Rules That Excess Dividend Is Liable To Tax At 30%
11. Nigeria: A Nation Pauperised by Tax Evasion
12. Countdown Begins to Expiration of VAT Exemption on Stock Exchange Transactions
13. COA Upholds FHC's Decision On The Applicability Of VAT To Services Provided Outside Nigeria