Toll Gates on Virtual Highways

I have a friend, let’s call her ‘Beauty’. She’s a super enterprising human being with a dogged spirit and a bright mind. Just some days ago, we were in a meeting with Media practitioners and she made super sound contributions. When she was done, she backed herself up by saying, ‘I know these things because I run a social media business’. And Beauty was not lying. Almost all her business ventures are conducted on the internet – mostly on Instagram. One of such is a fashion store for female clothing. She displays them, markets them, sells them, and sometimes receives payments over the internet.

In 2012, the Central Bank of Nigeria (CBN) released its cash(less) policy which is basically aimed at reducing the amount of physical cash circulating in the economy and encouraging the use of electronic payment options for transactions. The CBN stated that one of the objectives of this policy is ‘To drive development and modernization of our payment system in line with Nigeria’s vision 2020 goal of being amongst the top 20 economies by the year 2020.’

I don’t want to talk about why the country’s 2020 vision is unachievable (because if I talk about it, then it means I’ll have to think about and if I do that, then I’ll cry about it and I don’t really like to cry. So yeah. But just to know how bad things are, we were recently declared the world’s poverty capital).

Anyway, what I want to say is that amongst many things that would prevent Nigeria from being one of the top 20 economies, one which stands out for me is her failure to adequately capture e-commerce transactions in her tax administration.

N.B. (For the purpose of this article, I would be loosely defining e-commerce to be the buying and selling of goods and services over the internet and the paying for same electronically. Also, most of the businesses that this article would apply to are small informal internet businesses. Furthermore, I understand that payment may be made in cash for such businesses conducted online and so my definition does not extend to such transactions)  

Now taxes are inherently good. Irrespective (and with respect) to the negative sentiments many citizens have against taxation, it is a concept developed to supplement government revenue for the financing of public projects, public service as well as fostering the general growth of the economy.

Therefore, taxes are a major source of income for the government and for the economy. And although there isn’t much data available as to how many transactions / the worth of transactions conducted over the internet in Nigeria, we are well aware that e-commerce is real. People are buying and selling all sorts of things online. And maybe aside from the big names who, most likely, have the government watching them, many Nigerians who engage in e-commerce (like my friend, Beauty) never turn in taxes. And that’s a huge loss for the economy of the country.

So my questions are:

  1. Is it possible to effectively assess, collect and record taxes on e-commerce transactions carried out within Nigeria?
  2. If yes, how can it be done effectively – capturing every sale, and every transaction?

For the first question, I’ll state the obvious: It will be tricky and will require intentionality for e-commerce transactions to be effectively captured in our tax administration. This is because unlike businesses which have brick and mortar offices at which tax officers may visit and inspect, e-commerce businesses/transactions are “somewhere in the air.” Value-added taxes on the goods may never be charged or even remitted because how can these things be tracked?

But I’ve learned ‘never to say never’ ( meanwhile, I hate this saying because it makes you say ‘never’ whilst TELLING YOU NOT TO SAY THE DAMN WORD!). Anyway, so yes, my answer is ‘yes e-commerce transactions can be effectively and appropriately taxed in Nigeria.’

For the second question I have two suggestions which I have grouped into ‘The Cart’ and ‘The Horse’:

  1. The Cart: I call this the ‘Cart’ because it has to be in place before anything else can work out. It’s the proverbial cart before the horse and in my opinion, we’d be building castles in the air without it. It is simply this: Put some more structure in our national system. Our current identity and tax systems in Nigeria will not foster the capturing of informal commerce online. Even in jurisdictions that have some structure in place, taxing e-commerce is not the easiest thing. Therefore, in order to achieve this, here’s what needs to be done:
    1. There has to be good data protection law
    2. The harmonization of data by the National Identity Management Commission has to be effectively and properly carried out such that everyone is identifiable by their National Identification Number(NIN).
    3. Our National Identification Number (or say Bank Verification Number) must be tied to every financial activity carried out. For instance, if I sign up on say, Paystack to help process payments on my website, I’ll have to indicate my NIN.
    4. Tax authorities MUST simplify taxation information and make it superly available by using effective communication strategies.
    5. Tax registration and filing for businesses must be utterly simplified and tailored to suit small online businesses. It must not be a burden (financially or otherwise) for a small business to comply with tax rules.
    6. Tax authorities must then offer reasonable and innovative incentives to small e-commerce businesses who register and file taxes (e.g reduced shipping costs, co-working spaces maintained by the government, government promotion of their brand on a central platform, subsidized online courses on entrepreneurship or management offered by a Public University and so on).
  2. The Horse: This is called the ‘horse’ because it comes after. It looks like the real solution; the pragmatic solution, but it wouldn’t really function well if the cart is not in place. The Horse is E-governance. The market is online – and so the government must increase its proximity to the market. The Federal Inland Revenue Service (FIRS) already has a platform for online tax remittance. I know that Lagos State also has such on its platform.  However, in relation to e-commerce, this is not sufficient. So here’s my suggestion:
    1. A law/regulation released to the effect that every bank payment platform and every independent payment processor must request of its clients to indicate whether their platform/a transaction is one that would engage in commercial transactions involving VATable goods and services.
    2. Tax authorities then develop an API deployed to these payment channels to assess, receive and record the taxes on relevant transactions.

While I believe that this will take care of capturing some transactions done with e-payment channels, I am certain that there is a lacuna for cash payments or payments done with USSD codes. And of course, this might also push vendors to prefer these alternative options. And I’m also considering that some vendors may not disclose the nature of their business or transaction (which leads us back to my answer to the first question on structure). But we’d still be doing a lot better at collecting these taxes.

HOWEVER, if you asked me (and this is based not only on experience but on research), there is really just one thing the government needs to do to get people to voluntarily pay their taxes (whether personal income taxes or transaction taxes; whether on-site businesses or online businesses): The government needs to win the trust of the people. Our taxes have to be used for the purpose for which they are being contributed. The people need to know that if they pay taxes from their meagre income, they are in fact, doing themselves a favour. The people do NOT want their hard earned money to be pocketed by some lazy, self-serving, corrupt and frankly, wicked, government official.

The truth is that as long as citizens do not trust the system; as long as we are forced to become a government unto ourselves; as long as there is no confidence in the integrity of our systems, tax avoidance and evasion will continue and will get worse. And no technological intervention can cure that.

So while I have written this article acting somewhat as a government consultant, my higher purpose is the priority and protection of the citizens.


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4 thoughts on “Toll Gates on Virtual Highways”

  1. I’m just super glad to be commenting before D.R.
    Enlightening read. Like you concluded it’s a matter of trust; when it all comes down to it can we trust our government?

    BTW can transactions via cryptocurrency be taxed? What happens if they can not?

    1. Lol.
      It really is a matter of trust o. Taxation would never be effective if the citizens don’t trust the government.

      On the cryptocurrency question, the answer depends on several factors and location. If in Nigeria, well, our financial regulatory agencies do not recognize cryptocurrency; and it’s sort of an offence to trade in it. In the US though, the answer to this question would depend on whether the company or regulation falls under certain agencies like the FinCEN.

  2. Boro for President!!! This is another insightful one from you, thank you very much. The legislation around taxes in Nigeria needs a complete overhaul, I fear it cannot effectively cater for the rapidly advancing way we conduct business in the 21st century.

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