The current state of the Nigerian economy has forced the Federal Government to look to other sources of public revenue, as global oil prices remain low compared to their pre-2014 levels. To this end, taxes and levies are increasingly being viewed as a means of co-funding Nigeria’s growing national budget, now at 13.6 trillion naira. The 50% increase in Value Added Taxes (VAT), from 5% to 7.5%, in January 2020 came at no better time than when the Covid-19 virus came into Nigerian territory. The Federal Government used this as a means of averting a total crash of the economy.
Despite the need to widen the tax net and increase taxes on consumption, there are some sectors the government should be cautious about taxing ‘unnecessarily’. One of such sectors is the digital economy which the Federal Government at the moment is paying a lot of attention to because of its potential to easily create jobs and wealth for Nigeria’s largely youthful population. Some of the digital economy sub-sectors that could be affected by this policy direction include e-commerce, fintech, edutech, telemedicine, etc.
The Nature of Nigeria’s Digital Economy
The digital economy was one of Nigeria’s fastest-growing industries at the height of the Covid-19 pandemic. This was due to a significant transition to e-based operations in several local business models in the country’s major urban centers. As such, there is now a move to tax digital goods and services in Nigeria. On the 25th of June 2021, during a meeting with members of the Chartered Institute of Taxation of Nigeria (CITN), Vice President Yemi Osinbajo indicated the government’s plan to tax locally-based global tech giants. A move that would directly impact the likes of Facebook, Google, and Microsoft to name a few. This will inevitably affect the fast-rising stars that are increasingly attracting global investment and local talent.
Different Land, Different Rules
In Western Europe, several governments are presently rolling out digital taxes to be levied on firms such as Facebook, which has its European headquarters in Ireland. It would seem the Nigerian government is toeing the line but, at the same time, has failed to understand that the E.U. digital economy offers more stability to its players. The E.U. market provides such companies with so many other incentives and opportunities that the Nigerian business environment cannot provide now.
In terms of the World Bank’s ease of doing business rankings, Nigeria remains relatively low at 131 out of 190 economies. For quite some time, businesses have found it hard to operate in Nigeria due to a wide array of policy and non-policy issues. Thus, adding digital taxes to the mix will only give the targeted companies more reasons to eventually leave the market along with their investments.
Penny-Wise, Pound-Foolish
On the other hand, imposing huge taxes on social media firms and other Information Technology (IT) driven businesses in Nigeria could lead to tax burdens being transferred to consumers or even small enterprises that rely on these companies to promote their services amongst the public. Quite recently, Nigeria was one of the few nations that rejected the Organization for Economic Cooperation and Development’s (OECD) proposal for a global limitation on corporate tax to about 15%. The Federal Government is so fixated on ‘taxing’ tech giants operating in this market and is not willing to sign on to the OECD’s framework which about 90% of the global economy has accepted.
It is quite noble that with the myriad of problems facing our economy, the Federal Government seeks to diversify the means of generating funds to be used to keep things running. However, desperation must not be what drives fiscal or monetary policy creation and implementation. This can be likened to the Central Bank of Nigeria’s (CBN) restriction on access to foreign exchange which has only led to rising inflation in our import-dependent market.
Our economic and social policymakers must always keep in mind that socio-economic policies create both winners and losers. The more losers, the less needed such policies are. This is the same with taxing the digital economy, in its infancy, which can lead to tax burden transfers, loss of jobs, foreign divestments, and even the closure of local digitally enabled businesses. Being a digital and creative firm ourselves, we at Dyalect believe that more time is required for our digital economy to mature enough for its dividends to be substantially reaped. Fear must not drive policy, only logic should.
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