Nigeria: Burden of VAT Increase On Nigerians

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Value Added Tax - VAT
15 September 2019

The federal government is keen on making more money and has decided the people have to pay for it by way of an increase in value added tax. The proposed VAT increase is coming against the background of political and economic uncertainly occasioned by long-standing corruption, poor economic management and exacerbating budgetary financing. Nosa James-Igbinadolor reports

There is obviously a gargantuan hole in the country's 'purse'. The World Bank recently noted that fiscal deficits in Nigeria will likely widen further due to increased pre-election spending and sustained revenue shortfalls. Because the economy remains dependent on the 'minute' oil sector, which is less than 10 per cent of the GDP for the bulk of its fiscal revenues and foreign exchange earnings, this makes the country's balance of payments and government budgets vulnerable to volatilities in oil prices.

For a government that has increasingly financed its fiscal deficit from borrowings, there is no doubt that it needs more innovative approaches to scaling up its revenue capacities to meet its growing funding commitments.

It was against this background that on September 11, the Federal Executive Council agreed to a 44 per cent hike in Value Added Tax, VAT from 5 per cent to 7.2 per cent. The decision of the federal government to undertake this increment was not unexpected as there had been murmurings in government circles on the need for an increase as a veritable way of meeting the expansive fiscal expenditure needs of the federal government that have ballooned over the last five years.

Commitments including payment of the new minimum wage, which the immediate past Minister of Budget and National Planning, Udoma Udo Udoma, and the Executive Chairman of the FIRS, Babatunde Fowler, hinted during an interactive session with the National Assembly earlier in the year when they noted that VAT rate was likely to go up to enable government fund the new minimum wage of N30,000 per month approved by the National Assembly.

Fowler had held that the proposed payable VAT increment will be between 6.75 per cent and 7.25 per cent as against the five per cent on all products in the country. This implied an increase of between 35 per cent and 50 per cent. He added that the increment would affect the Company Income Tax and the Petroleum Profit Tax only.

In July, the Chairman, Revenue Mobilisation Allocation and Fiscal Commission (RMFAC), Engr. Elias Mbam, added his voice to the demand for an increment in VAT from 5 per cent to about 7.5 per cent to shore up Nigeria's revenue base which is heavily reliant on oil earnings with direct taxation, VAT and excise duties currently making up a small part.

Successive Nigerian governments have always insisted that the VAT rate is one of the lowest in the continent. CSL Stockbrokers agree that there is the need for government to bridge its revenue gap. They however fault the thinking that an increase in VAT would not lead to further economic scarring. In their view, "it may further worsen the living conditions of consumers whose real income have been stifled over recent years. Looking at the performance of consumer goods companies over the past 18 months, one striking feature is the consistent decline in reported revenue, suggesting that consumer demand remains weak."

The proposed VAT increase is coming against the background of political and economic uncertainly occasioned by long-standing corruption, poor economic management and exacerbating budgetary financing.

Choji Pwol, an Abuja based economist, believes that while an increase in VAT in an ordinary case would have been beneficial to Nigeria in the medium to long term. The current reason being proffered for this VAT increase is wrong and will lead to increased corruption and mismanagement, particularly at the state level since most of the money is not earmarked for capital projects or education. He posited that, "while the proposed increase will likely buoy and bolster the purchasing power of Nigerians by increasing the minimum wage, which on paper this government claims is the major reason for this increase to enable states pay for the increment, at best, the utilisation of funds at the state level is heavily mismanaged and the states stand to gain the most from this increase, because they already collect 50 percent of all VAT collection proceeds."

Because VAT is basically imposed on consumption, it is pertinent to understand that the diminished scale of consumption in the Nigerian economy may affect the collection performance of VAT. From a simple economic point of view, any increase in VAT would disproportionately affect poor people. But even beyond that argument, the biggest challenge is that any increase in indirect taxes affects the price of goods and services. This in turn would affect the country's inflation rate. With an inflation rate of over 11 per cent, the outcome of the proposed VAT increase is very critical given that the Central Bank of Nigeria is keen to contain inflationary pressures in the economy and bring inflation back to a single digit within a target range of 6-9 percent. It is thus expected that the rise in VAT would likely lead to a rise in inflation

Taiwo Oyedele of PwC Nigeria agrees that "contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality... VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer. Any increase in VAT rate without a registration threshold and zero rating of basic consumption will increase burden on the poor and SMEs contrary to the 2017 National Tax Policy. Trying to expand the VAT net while also increasing VAT rate at the same time is a faulty tax strategy. Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring robust administration rather than by increasing rate."

Oyedele added that "in any case, the likely increase in revenue will not be sufficient to pay the new minimum wage."

Pwol was of the same view when he told THISDAY that the mismanagement of federal government's intervention and the looting of the Paris club interventions by governors across the country was so blatant "they many could not even pay salaries after collecting huge sums of money, owing salaries of workers for up to two years in extreme cases". According to him, "if the projected N3 trillion VAT collections are realised in this year's budget, it means the state governments will gain an additional N1 trillion in revenue this year alone without an increase in the VAT rate, which is expected to kick in in the first quarter of 2020".

In its review of the proposed VAT hike, CSL Stockbrokers concluded that the plan by the federal government to finance the increment in the wage burden through tax increment would force companies to raise prices significantly, ultimately placing the incidence of the tax increment on the consumers. According to them, "in effect, we see this as a fiscal policy designed to 'rob Peter to pay Paul'. We also expect the increase in minimum wage to be eroded by price increases of key household items, offsetting the expected improvement in purchasing power. The proposed tax policies will also pose a downside for foreign investments in the Nigerian industrial climate as well as growth of SMEs. We believe companies who are unable to raise prices might lay off workers in a bid to manage costs, further impacting on the level of unemployment."

The reality is that any increase in VAT will be counter-intuitive to the goals of reducing poverty and inequality given the existing high economic disparity in the county where there is already a high cost associated with the poor accessing economic opportunities. But then again, VAT will inevitably affect everybody that spends money, both rich and poor.

It is understandable that government needs money and should find ways of getting the monies, but more critically, the federal government needs to clamp down hard on the expenditure side of things. Most critical of these is corruption and the cost of corruption, which has become an economic leviathan that crowds out efficient expenditure that benefits the country and its citizens.

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