Proposed VAT on e-commerce is aimed at levelling the playing field

In an interview with Business Insider, Partner at KPMG Nigeria’s Tax Regulatory & People Services vertical Adewale Ajayi has explained how the new 5% Vat being implemented on online purchases is to ensure that every customer in Nigeria is paying an equal amount of VAT. 

The Nigerian government has proposed 5% VAT in the e-commerce domain, sparking widespread outrage among Nigerian consumers. At a time when Nigeria is looking to foster a vibrant business environment, many have asserted that the new tax paradigm is likely to be counter-productive.

Ajayi explains how the current taxation policy in the e-commerce domain is not equitable. Under the current framework, customers who make a purchase on foreign e-commerce platforms such as Amazon avoid paying VAT altogether, while those using domestic e-commerce platforms are paying VAT.

It is to rectify this scenario that the Federal Inland Revenue Service (FIRS) in Nigeria is recommending 5% on all e-commerce purchases. The scenario is inequitable in its current form due to the absence of jurisdiction that the FIRS exerts on foreign e-commerce platforms.

“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,” explains Ajayi.

In addition to levelling the e-commerce landscape, the proposed VAT will also help tackle the revenue collection issue in Nigeria. Tax defaults are high in Nigeria, which is severely denting government coffers. Other solutions that have been proposed – alongside an increase in VAT – include the digitalisation of tax collection processes, and a focus on overall economic growth.

Ajayi believes that the new VAT will be a good strategy in this regard, although its is not without its obstacles. “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,” he explains.