Implications of Imposing Excise Tax on Foreign Exchange Transactions in the Parallel Market

Andersen Nigeria's Podcast

This article examines the proposed taxation of foreign exchange transactions in the parallel market and its implications on the economy and taxpayers.

Parallel foreign exchange markets or “black market” as it is popularly called, has been in existence for a while now and has become a common phenomenon in most developing countries. In Nigeria, the market has grown in to become a major and ready source of foreign exchange to most individuals, corporate bodies and to some other participants in the economy. The implication of this is that as the parallel market for foreign exchange expands and the majority depend more on it for their transactions, the government loses control over the foreign exchange market as more of the official transactions are diverted to the parallel market.

To curtail this overbearing reach of the activities of the parallel market and its impact on the Nigerian economy, the Presidential Committee on Fiscal Policy and Tax Reforms proposed imposing excise taxes on foreign exchange transactions conducted outside the official exchange market.

The major reasons why the Presidential Committee seeks to impose an excise tax on foreign exchange transactions in the parallel Market is the additional revenue the initiative would generate for the government, if implemented particularly as the transactions carried out daily in the Market are voluminous. Imposing an excise tax on these transactions could open a new stream of income for the government to fund its increasing costs.

The recommendation proposed by the Presidential Committee aims at controlling the adverse exchange rate fluctuation currently bedeviling the Nigerian economy, unifying the official and parallel market rates in the long run, and proffering additional streams of revenue for the government. In achieving the desired objectives, policymakers must weigh the impact of the proposed recommendation on taxpayers both in the short term and long term before implementing the policy. This is to ensure that taxpayers (individuals and businesses) are not overburdened.

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