AN EVALUATION OF THE CHALLENGES OF IMPLEMENTING A DIGITAL VAT SYSTEM

The digitalisation of the global economy has fundamentally transformed how businesses operate and how value is created, yet tax systems worldwide have struggled to adapt to these changes. This study evaluated the challenges of implementing a digital Value Added Tax (VAT) system, with particular focus on Nigeria as a case study within the broader African context. The research aimed to: (1) identify the technological and infrastructural challenges hindering effective digital VAT implementation; (2) examine the compliance and enforcement challenges associated with collecting VAT from non-resident digital service providers; and (3) assess the administrative and regulatory challenges facing tax authorities in implementing digital VAT systems. The study adopted a mixed-methods research design, combining quantitative survey data from 384 tax professionals, business owners, and tax officials with qualitative interviews of 15 key informants. The theoretical framework integrated the Technology Acceptance Model, Fiscal Exchange Theory, and Regulatory Capture Theory. Findings revealed that significant technological challenges persist, including low internet penetration in rural areas (only 42% of respondents reported reliable connectivity), inadequate interoperability between tax authority systems and business accounting software, and data security concerns (cited by 67% of respondents). Compliance challenges were equally substantial, with only 38% of non-resident digital service providers voluntarily registering for VAT, while enforcement mechanisms remained weak due to jurisdictional limitations. Administrative challenges included fragmented regulatory frameworks across jurisdictions, high compliance costs for small businesses (averaging $2,500 annually for digital VAT compliance), and limited technical capacity within tax authorities. The study concludes that successful digital VAT implementation requires a holistic approach addressing technological infrastructure, international cooperation mechanisms, and simplified compliance procedures for small businesses. Recommendations include the establishment of regional harmonisation frameworks, investment in digital literacy programmes, development of low-cost compliance solutions for SMEs, and strengthened international information-sharing agreements. The study contributes to tax policy literature by providing empirical evidence on implementation challenges in developing economy contexts and offers practical guidance for policymakers undertaking digital tax reforms.
Keywords: Digital VAT, Tax Compliance, Non-resident Taxation, Digital Economy, Tax Administration, E-invoicing