The Decentralisation of the Administration of VAT and the CBN E-Naira

The VAT issue between the states, with Rivers State at the fore front and the Federal Government represented by the Federal Inland Revenue Service (FIRS) has recently been at the peak of conversations among stakeholders. A number of states - Osun, Ogun, and Lagos States have also joined in the battle by enacting their VAT Laws which seeks to administer the imposition and collection of VAT in the States by the respective State Internal Revenue Service. This move by the States will have the implication of decentralizing VAT administration in Nigeria. You can check our social media post to learn more about the Value Added Tax.

How Will The Decentralization of VAT Administration Affect Startups?​

• There are two established bases for the imposition of VAT; the destination and the origin principles. Nigeria’s current VAT administration is based on the destination principle where the tax is levied by where the service is consumed rather than where it originated. If States enact conflicting VAT laws, individuals and other entities, especially startups will bear the brunt of any VAT charged and it will be an increased cost.
• Startups that are in the production and distribution value chain will be affected by being charged with VAT in States of production and another in States of distribution. This can lead to complexities and double taxation.
• In Nigeria, every startup is expected to file just one VAT return regardless of the number of states where it has operations. A startup has one tax identification number and one tax office where its file is domiciled. Obviously, that would no longer be the case as startups may have to register with multiple tax authorities and file multiple tax returns monthly. This obviously would create some compliance challenges.
• The various VAT rates are also issues of concern. For example, the Lagos State VAT Law stipulates 6% as the VAT rate whereas some other States have theirs as high as up to 8%. The extant VAT Act is 7.5%.
• In conclusion, the exemption of startups with less than 25 million Naira annual turnover under the Finance Act may no longer apply, if the various States’ VAT laws do not make provision for it. The implication of this is that more early-stage startups will be charged with and required to pay the VAT. This ultimately deals a blow on Nigeria’s ease of doing business rating.

In June 2021, the Central Bank of Nigeria (CBN) after two years of contemplation on digital currency technology announced plans to launch a digital currency tagged ‘e-Naira’ by 1st of October 2021 (today), joining other countries like India, China, South Africa, Ghana that have also decided on a home-grown digital currency. However, the Apex bank has postponed the launch until further notice.

E-Naira is a digital currency to be issued by the Nigerian government through the CBN with the same value as the fiat naira notes. It can be purchased by the general public and transferred into e-wallets. It is similar to the Chinese digital renminbi and the Swedish e-krona.

Is There Any Difference Between the Cryptocurrency Banned By The Central Bank Nigeria And The Newly Introduced E-Naira?​

• ‍Regulation: Central Bank Digital Currencies (CBDCs) like the e-naira are different from cryptocurrencies. Cryptocurrencies like Ethereum, Bitcoin, or Dogecoin are decentralised. This means that they are not regulated by any central authority CBDCs on the other hand are regulated by the authority of the state, in the case of Nigeria – the CBN.‍
• Liability: Cryptocurrency is not recognized as a legal tender in Nigeria, but the e-naira will be recognized as a CBN-backed legal tender. It is a direct liability of the Central Bank of Nigeria.‍
• Relation To Fiat Currency: Digital currencies are forms of fiat currency available in electronic/virtual forms, typically issued by Central Banks and are subject to all the scrutiny of fiat currencies. Cryptocurrencies, while being digital are not issued by Central Banks or related to any fiat currency. The e-naira will not grow in value like Bitcoin or other cryptocurrencies but it will function the same way the Naira does.‍
• Stability: A cryptocurrency is a decentralised form of encrypted digital currency based on blockchain technology whilst e-Naira is a government-controlled digital currency envisaged to be more stable than cryptocurrency as its value is to be at par with the country's official currency. CBDC is usually stable and it is relatively easy to manage its transactions because of wider acceptance in the global market. Cryptocurrencies on the other hand are highly volatile and not many companies have started accepting payments with cryptocurrencies.
• ‍Encryption: Digital currency does not require encryption, but users need to secure their digital wallets (banking apps) with strong passwords to minimize the risk of theft or hacking, whereas cryptocurrency is protected by strong encryption.

​Conclusion

The e-Naira will promote formal cross-border payments for efficiency, convenience and affordability. With the launch of the Africa Continental Free Trade Area Agreement (AfCFTA), e-Naira will create opportunities in the financial system in the form of emerging business models, financial products and services. Similarly, it creates an opportunity to unlock new revenue and growth opportunities.

The adoption of e-Naira will facilitate financial inclusion by increasing the share of the population with access to financial products. With the financial inclusion it envisages, there is no doubt that the fintech sector will receive a lot of boosts and encourage the emergence of early-stage startups.

Lastly, the e-Naira will enable banks to bridge the financial gap by establishing infrastructure - especially in the rural communities. It will also allow Nigeria's informal economy to go mainstream, giving them access to services like credit and insurance, allowing them to expand their business and maximize potentials.