EFFECT OF DIGITAL SERVICE TAX ON TAX REVENUE AND FOREIGN DIRECT INVESTMENT IN NIGERIA

Abstract

This study investigates the effect of Nigeria’s Digital Service Tax (DST) on two principal tax revenue streams—Value Added Tax (VAT) and Company Income Tax (CIT)—and on Foreign Direct Investment (FDI) inflows between 2014 and 2024. Employing an ex post facto research design and secondary time-series data from the Federal Inland Revenue Service, Central Bank of Nigeria, and World Bank, the analysis uses Ordinary Least Squares regression with a DST dummy variable (0 = pre-2020, 1 = post-2020) to quantify policy impacts. Results reveal that the introduction of DST is associated with an average annual increase of ₦375.36 billion in digital VAT (R² = 0.687, p = 0.003) and ₦710.06 billion in digital CIT revenue (R² = 0.668, p = 0.004). Contrary to concerns about investment displacement, digital-sector FDI inflows rose by an average of USD 1,039.36 million post-DST (R² = 0.659, p = 0.004), suggesting that clear and transparent digital tax rules can coexist with—and may even bolster—foreign investment. These findings validate the Benefit Theory of Taxation in the digital context, demonstrating that entities deriving value from Nigeria’s digital ecosystem contribute equitably to public revenues without deterring capital inflows. Policy recommendations include enhancing digital tax administration capacity, clarifying DST guidelines to stakeholders, and earmarking DST proceeds for digital infrastructure development. The study contributes novel empirical benchmarks for digital tax policy and provides a foundation for future cross-country and sectoral analyses.