E-commerce And Challenges Of Taxation in Evolving Market

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By Racheal Ishaya,

The planned imposition of five per cent tax on all online purchases from next year by the Federal Government was aimed at raising the revenue base of the country.

But there are fears that the new policy may pose and provoke new challenges.

Without doubt, the Information Communication Technology (ICT) sector has great potential for revenue generation.

The National Bureau of Statistics (NBS), puts ICT current contribution to Nigeria’s Gross Domestic Product (GDP) at 12.4 per cent, while Nigeria ranked 7th in the world in the use of the internet.

Available statistics showed that in 2018, about 22.4 million Nigerians (about 11.2 per cent of the population) were monthly active Facebook users, followed by those patronising  Twitter put at 8.35 per cent, Pinterest ranked third with 7.08 per cent, followed by YouTube.

The social media platforms present a huge market for exchange of goods and services online.

Unarguably, ICT has opened opportunities and new ways of doing business; today, a sizeable portion of businesses are transacted with various mobile platforms and online payment systems called e-commerce.

Online commerce and financial technology in Nigeria is strengthened by fast-growing population, expanding consumer power, and increased smartphone penetrations.

McKinsey, a management consulting firm, estimates Nigeria’s e-commerce spending at over $12 billion, while it is projected to reach about $75 billion per annum by 2025.

The recent cashless policy announced by the Central Bank of Nigeria (CBN), was aimed at encouraging more electronic-based transactions, in terms of payments for goods, services, transfers, among others.

Today, businesses and transactions are finalised without physical contact between the manufacturer and the final consumer, especially with the advent of platforms like Amazon, E-bay, Konga, Jumia, AliExpress, among others.

As the government is looking for alternative ways to mobilise revenue to support the dwindling oil earnings, proposals were made to the government to tax all online transactions.

But, whilst there are numerous benefits of e-commerce, a paradigm shift from a physical to an ‘invisible’ business framework, comes with its challenges, particularly on tracking transactions for taxation purposes.

This is a potential avenue for loss of returns payable to an economy, but the challenges posed by the digital economy to tax authorities are not peculiar to Nigeria.

Many countries in Europe face similar challenges and are also looking at the best approach to tackle them.

At a recent meeting of the African Tax Administration Forum, the Executive Secretary, Logan Wort, said e-commerce has changed the distribution of taxable activities.

Wort says the development poses serious challenges in determining the jurisdiction to tax income and alters the balance of taxing authority, resulting in erosion of countries’ tax bases.

According to the executive secretary, e-commerce creates difficulties in the identification and location of the taxpayer.

He said the identification and verification of taxable transactions and the ability to establish a link between taxpayers and their taxable transactions have been made even more difficult, thus creating opportunities for tax evasion.

“The execution of these transactions requires minimal human intervention. It, therefore, follows that the taxation of cross-border digital transactions should preferably be done electronically and with minimal human intervention,” he said.

Besides, he said a withholding tax mechanism by financial institutions through the implementation of a real-time (RT)-VAT system, offers this possibility, he added.

Mr Babatunde Fowler, the Chairman, Federal Inland Revenue Service (FIRS), hinted recently that the FIRS would from next year begin the collection of value added tax (VAT) on online transactions.

According to Fowler, the FIRS plans to start directing banks in Nigeria to impose five per cent VAT on all online transactions and purchases of goods and services.

“All those who make payments for purchases online will soon be made to pay VAT.

“Though VAT is based on consumption, general items such as education and healthcare products and services are VAT exempt, because those are the main things everybody requires.

“ The needy will not pay VAT on these products and services, the rich will equally not pay VAT on them.

“Right now, VAT is not inclusive on most online transactions. I have not seen any local online store that charges VAT on purchases, and you cannot assume that   items bought are VAT inclusive.

“Clearly, by all taxing authorities, if you’re paying tax on any purchase, it should be stated on your receipt, alongside the price of the product.

“Currently, there is nothing like that on online transactions because we’re not paying.

“That is against the law and against good faith when conducting business. It is even unfair business practice, because they (online stores) will be able to sell their products cheaper than the next person.

“So apart from not obeying the tax laws, they are given an unfair advantage over their competitors,” Fowler said.

A tax expert, Patricia Auta, said directing banks to impose VAT on online transactions would impose additional obligation of monitoring and tracking various e-commerce transactions on banks.

She said this could also expose the banks to tax audit risks, as the FIRS would strive to ensure compliance and proper remittances of the VAT collections, adding that collection of VAT on such transactions by banks could amount to double taxation.

In her view, since the supplier of the goods and service has already charged and remitted VAT on the same transactions, given that the VAT Act imposes the obligation to charge and remit VAT on the supplier of VATable goods and services, it will amount to double taxation for the buyer to also be charged VAT.

“Another critical issue is how the banks are expected to determine VATable transactions and the mode of calculating and imposing VAT on the goods and services supplied online.

“The law allows a supplier of goods and services to make the necessary adjustments between the output VAT and input VAT, before computing the VAT on the product supplied. As such, it would be absurd to mandate banks to make arbitrary deductions on the basis of output VAT.”

Industry watchers say while it is desirable for the FIRS to expand the tax base in order to capture defaulting taxpayers, it is also necessary for the FIRS to keep proper records of online transactions and exercise reasonable caution in the VAT collection process, to avoid imposing tax on already compliant taxpayers.

The increasing number of business transactions that are consummated over digital platforms show that e-commerce is the future of business interactions, and should therefore be taxed appropriately. (NANFeatures)

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