Impending Cybersecurity Levy in Nigeria to Impose N1.5 Trillion Tax Burden on Businesses and Households

The cybersecurity levy proposed by the federal government is projected to impose a tax burden of N1.5 trillion on businesses and households in Nigeria, according to leading accounting firm Kreston Pedabo.

Killian Khanoba, Senior Partner at Kreston Pedabo, highlighted that despite the exemption of certain transactions as per the CBN circular, the Nigeria Inter-Bank Settlement System Plc (NIBSS) reported a significant 55% increase in the value of electronic transactions to N600 trillion in 2023. This surge in electronic transactions underscores the growing reliance on digital platforms for financial activities, raising concerns about the potential financial implications of the proposed cybersecurity levy on businesses and households.

Killian Khanoba noted that this trend could result in an increased preference for cash transactions, potentially slowing down business activities and affecting the overall business landscape in Nigeria.He highlighted that ongoing talks about streamlining the tax system in Nigeria to single digits make it challenging to justify the introduction of the Cybercrime levy in its current form as proposed by the CBN. Khanoba suggested that the implementation of such a levy could be counterproductive to the Committee's efforts to simplify and optimize the tax structure in the country.

Killian Khanoba highlighted that the proposed cybersecurity levy would result in increased transaction and financing expenses for all stakeholders, including businesses and individuals. He emphasized that the impact would be particularly significant for Micro, Small, and Medium Enterprises (MSMEs) as they often transfer funds between business and personal accounts, leading to higher costs and potential value erosion.

Khanoba noted that the implementation of the levy could generate substantial revenue if successfully executed by the CBN. According to NIBSS reports, the value of electronic transactions has been on the rise, indicating the potential for significant revenue collection through the proposed levy.

The proposed cybersecurity levy has the potential to generate significant revenue if effectively implemented by the CBN. NIBSS data indicates a substantial 55% increase in the value of electronic transactions to N600 trillion in 2023. Even after factoring in a 50% discount to accommodate exempted transactions as per the CBN circular, the government stands to generate approximately N1.5 trillion annually based on the 2023 transaction volume. This amount represents around eight percent of the total revenue budget for 2024.

The question arises as to how this additional revenue will be utilized by the government to enhance cybersecurity measures and address potential concerns regarding the impact of the levy on businesses and households. It is crucial for policymakers to transparently communicate the allocation and utilization of these funds to ensure accountability and effective implementation of cybersecurity initiatives in Nigeria.

The implementation of the proposed cybersecurity levy is deemed unwise and should be postponed until it aligns appropriately with the overall tax framework of the nation, a responsibility entrusted to the Presidential Committee on Fiscal Policy and Tax Reforms. It is important to consider that the government already imposes the Nigeria Information Technology Development Fund (NITDF) Levy on the companies listed in the Second Schedule of the Cybercrime Act, which amounts to one percent of their pre-tax earnings.

Given this existing levy, a viable alternative could be to increase the rate of the NITDF Levy and allocate the generated proceeds towards enhancing cybersecurity measures. This approach would leverage the existing framework and resources while addressing the need for additional funding to bolster cybersecurity efforts in Nigeria.

Killian Khanoba highlighted that alongside the proposal to increase the VAT rate, there is an underlying objective to reform the Nigerian VAT system. Currently, the system is not purely a value-added tax (VAT) but rather a quasi-goods and service tax (GST) system. In a pure VAT system, the focus is on taxing the final consumer rather than businesses, achieved through the full recovery of input VAT from the output VAT generated.

However, the Nigerian VAT system has not fully adhered to this principle, leading to restrictions on input VAT recovery for businesses. This deviation from the pure VAT model has implications for businesses operating within the Nigerian tax framework, impacting their ability to recover input VAT and potentially increasing their tax burden.