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Tax Matters: How VAT on Online Transaction Will Affect You

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VAT Through the Federal Inland Revenue (FIRS), Nigeria’s federal government asked banks and other online service providers involved in online payment settlement to collect VAT on online transactions since January 2020.

Many stakeholders and experts have expressed their concerns over the 7.5% Value Added Tax (VAT) on all online transactions. They pointed out that the move would constitute a threat to businesses that operate in the country, particularly those in the e-commerce industry.

What this means: Banks, Payment providers, credit cards, and other electronic payment schemes hold back 7.5% VAT on any transaction between you and an online seller.

What is VAT?

Value-added tax (VAT) is a type of indirect tax levied on goods and services for value-added at every point of production or distribution cycle, starting from raw materials and going all the way to the final retail purchase. VAT was introduced on April 1, 2005. It can also be referred to as the tax you pay when you buy goods like electronics, phones, food, generators, etc. or when you pay for a service like transportation, airtime for your phones, cinema shows, etc.).

Don’t let the name deceive you; VAT is charged whether you think value has been added or not. Nigeria’s rate is placed at 7.5% (raised from 5% on 1st February 2020). This means that for a good that costs N5, 000 you will pay an extra N250 as VAT to the government, making your total bill N5 250  when the seller does not already add it.

Most sellers in Nigeria include VAT in their listed prices and will sort out the VAT figures with the government (we call this VAT inclusive price), and it’s indicated in the receipt given to you. An example of Vat inclusive product in Nigeria is recharge cards.

Are you charge VAT on every Goods or Service you Recieve

No. The VAT law has a list of goods and services that VAT is to be charged. Examples of goods and services exempted from VAT are Medical and pharmaceutical products, Education tuition fees & books, basic food items like raw yam, beans plantain ( VAT are charged if they are processed further and sold), baby products, etc. Also, some transactions are exempted from VAT because they don’t qualify as goods or services. Examples include land sale/lease, company shares, loans, etc.

Who should pay VAT?

This is a question that is asked by all. The seller of a product or service provider is expected to charge VAT to pay the customer/buyer. The TAX law mandates any person selling goods or rendering services to register with FIRS and charge VAT on their sales. Failure to do this attracts fines from the government.

 Is Vat Paid only when You Order Online?

VAT is applied when you buy goods or services online or offline (Online VAT became effective January 2020). Whether you pay cash for your goods or through electronic means, you pay for VAT.

For this article, we classified online transactions into 4 categories:

(1) Online sale of goods by local businesses (like buying electronics on Jumia, Konga, or a registered business on Instagram). VAT is added by the seller’s and remitted to FIRS

(2) Local services provided or ordered online (e.g., DSTV subscription, Recharge cards). VAT is added when you make calls and the cost of recharge.

(3) Online sale of goods by foreign sellers (e.g., buying a phone from eBay or Amazon).

(4) Foreign services provided or ordered online – Examples include when you subscribe to Netflix or pay for Facebook or Instagram ads. 

VAT

 Why should you care?

The increase in online transactions due to the cashless policy Government wants to ensure that online transactions don’t escape VAT. Most individuals are not aware that they are being charged VAT on goods or services they buy online. The implementation of VAT on goods and services you get online automatically means that the Cost of the goods Will increase because the seller is meant to add the VAT to the selling price. Also, VAT was added to his or her raw material. This means that the more transaction you do online, the more VAT you pay. When you get a shoe online for #10,000, the shoe’s original cost should be #9,250 but now 10,000 because #750 for VAT has been added and even worst when it’s not added that means you will be charged #10,750. This also means that you don’t get the exact value for the goods or service you paid for.

Conclusively as an individual, you are paying more for whatever goods or services you get online; as an E-commerce owner, the number of people who buy from you will reduce. Come to think of it; whether you buy online to offline, you are being charged for VAT. The only way to reduce the amount of VAT you pay is to reduce the number of processed goods or services you buy.

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