As federal government continues to contemplate ways to cover its increasing recurrent expenditure, the effect of tax burden on the citizens must be considered.
The federal government recently gauged the willingness of citizens to accept an increase in Value Added Tax (VAT) in its quest to shore up its revenue.
Even though it appeared that the government has since backtracked following strong opposition to the move, proponents of the initiative insists that with the country's swelling debt service and its low revenue generating profile, a VAT hike should be implemented.
Minister of Finance, Mrs. Zainab Ahmed, had early this year, said the government was considering tough measures to achieve higher revenue.
Ahmed, who revealed that the government was planning to introduce higher VAT and excise duties, only for carbonated drinks produced in Nigeria, for which the producers were not paying excise duties, stressed that the government needed to do more to achieve higher revenue.
"Peer comparison on our ability to convert Gross Domestic Product (GDP) to revenue for capital and social investment key drivers of sustainable economic growth -show that we have a lot to do to catch up.
"Nigeria must mobilise significant resources to invest in human capital development and critical infrastructure.
"Indeed, some reforms will be tough, but it must be done if we will look at the facts and be frank to ourselves. Given the low revenue to GDP ratio (currently at about seven per cent), we must pursue optimal revenue generation," she had explained.
But it was Minister for Budget and National Planning, Udoma Udo Udoma and the Executive Chairman of the FIRS, Babatunde Fowler, who during an interactive session with the National Assembly, disclosed the intention of the federal government to raise the VAT rate up, to enable government fund the new minimum wage of N30,000.
However, the FIRS subsequently clarified that the intention was to increase compliance rate and not tax rates, even though the agency advised Nigerians to be ready for a VAT rate increase by the end of this year.
Afterwards, the pronouncement by the government officials attract debate. While some believe that in order to boost government's revenue, there is need for a comprehensive reform of Nigeria's tax system, which should include a hike in the VAT, some argue that expanding the tax net is the way to go. According to those who were against the move, a hike in VAT would worsen the poverty situation in the country.
Potentially, an increase of about 50 per cent would raise the current standard VAT rate of five per cent to 7.5 per cent.
The average VAT collection in the past six years is about N900 billion. The revenue is shared 15 per cent to the federal government, 50 per cent to states and 35 per cent local governments net of four per cent cost of collection to FIRS.
The federal government had in January this year unveiled a Strategic Revenue Growth Initiative (SRGI) for sustainable revenue generation in various sectors of the economy, part of which was to increase the VAT.
Ahmed, had said the implementation of the initiative would significantly boost the federal government revenue outlook in the months and years ahead.
According to the minister, Nigeria's low revenue generation capabilities had been an enduring challenge to past and present governments.
No to VAT Hike
To the Tax Leader, PwC, Taiwo Oyedele, PwC, if VAT rate is increased by 50 per cent, all things being equal, the country would generate on average an additional N450 billion annually. And less four per cent cost of collection to FIRS, all the 36 states would get N18 billion per month translating to an average of N500 million per state.
According to him, since Lagos, Federal Capital Territory, Rivers, Kano and Kaduna generate 87 per cent of VAT revenue, they also share a big chunk of VAT revenue, meaning that the financially disadvantaged states would get much less than N500 million monthly.
"Unfortunately, all things are never equal especially when it comes to tax. An increase in VAT rate will inevitably impact on consumption and VAT compliance. The combined effect will reduce the expected revenue.
"Beyond the revenue impact, there will be other unintended consequences including higher inflation, interest rate hike, more unemployment and people will generally become poorer.
Furthermore, he noted that without a VAT registration threshold and zero rating of basic consumption, it would increase the burden on the poor and SMEs contrary to the 2017 National Tax Policy.
Therefore, Oyedele advised that rather than raising VAT, Nigeria would make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring a robust administration rather than by increasing rate.
"This should include a review of VAT waivers, better policing of the border to improve import VAT collection, framework for VAT on imported services and digital economy.
"Contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality. In any case the likely increase in revenue will not be sufficient to pay the new minimum wage," he said.
Also, analysts at FSDH Merchant Bank Limited, stated that the federal government could earn more revenue from VAT by developing strategies to increase household consumption and increase compliance.
According to the FSDH, consumption data and revenue from VAT in the Federation Account Allocation Committee (FAAC) showed that the ratio of VAT revenue to household consumption averaged 1.07 per cent between 2014 and 2018, with the highest of 1.15 per cent recorded in 2014.
This, it stated was significantly lower than the actual VAT rate of five per cent.
Head of Research at FSDH Merchant Bank, Ayodele Akinwunmi, pointed out that it was important to note that some household consumption items are exempted from VAT.
Therefore, the ratio of VAT revenue to household that government may not necessarily be equal to the VAT rate of five per cent.
The products and services exempted from VAT include all medical and pharmaceutical products and services, basic food items, baby products, books and educational materials and all exported products and services
"However, FSDH Research believes government can raise the ratio to 2.5 per cent with appropriate measures in place," Akinwunmi explained.
He, however, said low VAT revenue could be linked to the large informal sector in Nigeria whose VAT is difficult to capture; non-remittance of VAT collected by certain collection agents and weak consumption in Nigeria
"If the consumption grows and the ratio of VAT revenue to GDP increases to 2.5 per cent from 2019 through 2023, government may be able raise VAT revenue from N1.09 trillion in 2018 to N3.47 trillion in 2023," he added.
Also, a Port Harcourt-based oil and gas operator, Mr Adamu Mutairu, said a hike in the VAT would not only be counterproductive, but would further impoverish Nigerians, lead to an increase in the cost of goods and services and intensify inflationary pressure.
He said it was already bad enough that difficult business climate resulting from election anxiety, insecurity and hostile government policies among others have continued to hamper the growth of businesses.
"For me, it is necessary that any attempt at VAT increment must take into consideration the difficult times in the country's economy.
"It is apparent on the need for the FIRS to redouble its efforts to ensure that more people are widely captured into the VAT net in order to boost the nation's revenues. "Obviously, lots of people and corporate entities in the country are not paying VAT following the inability of the FIRS to aptly capture such individuals or corporate entities, furthermore others are paying taxes without VAT due to reduced compliance," he added.
He also said increasing VAT was an indirect way of inflicting pains and sending the wrong signals to Nigerians few days after the re-election of the president.
"If VAT is increased without a corresponding decrease in Corporate Income Tax, it would additionally build the cost of goods and services, intensify inflationary anxiety, depress stocks' price and increase transactions cost in the country," he added.
He urged the federal government to continue to sensitise and encourage Nigerians to cultivate the culture of paying taxes by ensuring fair implementation policy and effective utilisation of resources.
He said there was need for the federal government to take deliberate steps to enhance and expand its revenue base, but not one that will impoverish the people and pitch them against the government.
Also, a former Lagos State Governor, Senator Bola Tinubu, warned the federal government against increasing the VAT, saying doing so would reduce people's purchasing power and further slowdown the economy.
According to Tinubu, the timing would also be wrong, advising the government that instead of increasing VAT, it should rather broaden the scope of tax collection with a view to making more people pay and thus put paid to any planned increase in VAT rate.
"Let's widen the tax net. Those who are not paying now, even if it is inclusive of Bola Tinubu, let the net get bigger and take more taxes and that is what we must do in the country instead of additional layer in taxes," he advised.
Need to Hike VAT
To Prof. Akpan Ekpo, who is the Executive Chairman, Foundation for Economic Research and Training, there is need to bring in more people into the tax net.
According to Ekpo, a lot of wealthy Nigerians don't pay tax.
"You have to bring them into the tax net, then you have to tax luxury goods heavily. For example, if you go to Abuja and Lagos airports, the number of private jets that you see, they should pay tax.
"Thirdly, people will not like to hear this, our VAT rate is the lowest in the world. If you tinker with VAT to even 6.5 per cent, that will generate a lot of revenue. Right now, the government needs liquidity to do a lot of things.
"But there is a limit to taxation, you have to have service delivery, I pay tax because I get service. If people are not happy about the service delivery they will not pay tax, except those who are working and they don't have a choice," he added.
Also, Proshare, an online financial information service hub, stated in a recent report that if the country is to reduce unemployment and stimulate economic growth, the federal government has to take bold steps which includes raising the VAT.
While the report stressed that in times of slow growth, economists would typically not prescribe raising taxes, it noted that since Nigeria currently has the lowest VAT in West Africa at five per cent, the government could be bold to increase the tax by at least 200 basis points, pushing the rate up by two per cent.
It advised that if implemented, the government should therefore concentrate the additional revenue in infrastructural development that helps to drop the cost of doing business and citizen transactions to create headroom for consumption which would spur business growth.
This, over a period of 36 months, it stated, could reduce the cost of distribution of goods and services, thereby resulting in massive savings in logistics costs which could turn up as major improvements in corporate bottom lines and additional tax income; successfully closing the revenue-expenditure gap.
"It's all about productivity enhancement and not hand-outs to the most vulnerable in the society the way it is done.
"You protect the most vulnerable by establishing public safety nets such as unemployment benefits, health services, state subsidised housing etc - all of which has to be paid for from the increase in productivity (translating to tax revenues), plugging of leakages through system/process improvements and adjusting the fiscal regime of taxes of tariffs to spur growth in the short term which will be clawed back to attain near equilibrium (illusory to get an optimum) as progress is attained," the report stated.
Clearly, Nigeria is facing a major challenge in terms of revenue mobilisation and debt service and must take urgent steps to enhance its revenue. Indeed, there is need for a comprehensive tax reform in the country.
However, considering the ongoing debate on the VAT, analysts have suggested that measures such as leverage existing associations/ecosystems in the informal sector to encourage and aid in VAT collection and remittance to government; continue to work with the deferent operators in the financial industry to increase financial inclusion and reduce informal sector of the economy; enforcement of appropriate sanctions on any agent who defaults in VAT collections and remittances; organise sensitisation programs for collections agents to educate them on their roles in VAT collections and remittances and deploying technology to capture VAT payers and give them incentives at the end of a fiscal year, should be adopted to enhance tax revenue in the country.
Others include the deployment of technology to capture the collection agents and to give them collection incentives at the end of the fiscal year.
The efforts to increase VAT compliance and block leakages may increase VAT revenue by N8.25 trillion between 2019 and 2023 without increasing the VAT tax rate from five per cent, they noted.
On its part, the FSDH Merchant Bank recommends the sale of government assets that are not currently profitable and are draining government's meagre resources. This, the firm noted would generate income for the government in the short-term and save income for the government in the medium to long-term.