As the federal government contemplates raising the Value Added Tax, it must weigh the effect of tax burden on the citizens.
The federal government's last week announcement of its plan to raise the Value Added Tax (VAT) by 50 per cent, from five per cent to 7.5 per cent has continued to generate divergent views across the country.
The Manufacturers Association of Nigeria (MAN), the Lagos Chamber of Commerce and Industry (LCCI), the Nigeria Employers' Consultative Association (NECA), the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) and other private sector operators argued that raising VAT would have negative impact on the real sector and the economy.
Considering that the federal government recently approved a new minimum wage, which has yet to be fully implemented, those who opposed the policy wondered if the plan to increase VAT was not a strategy to "rob Peter to pay Paul," as the increase in minimum wage would be eroded by price increases of key household items, offsetting the expected improvement in purchasing power.
As a result of this, they argued that the policy, if implemented would worsen the poverty situation in the country
On the other hand, proponents of the proposal argued that that with the country's swelling debt service and government's low revenue profile, a VAT hike should be implemented.
VAT is an indirect tax levied on the value added by producers, suppliers, and service providers at each point in a supply chain. Its cost is usually passed on to the consumer.
According to a report by ActionAid International, the cost of VAT is passed down the supply chain, by being included in sales prices, until it reaches the consumer who cannot pass on this cost.
For this reason, VAT is usually considered to be borne by the consumer. VAT is different from a traditional sales tax because the latter is paid at the point where the customer buys the product, whereas VAT is paid by all the firms along the supply chain.
The average VAT collection in the past six years in Nigeria 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 the Federal Inland Revenue Service.
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.
The government had said the implementation of the initiative would significantly boost the federal government revenue outlook in the months and years ahead.
It had stated that Nigeria's low revenue generation capabilities had been an enduring challenge to past and present governments.
After initially announcing that it planned to raise VAT to 7.2 per cent, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, the following day said what the Federal Executive Council (FEC) approved was an increase from five per cent to 7.5 per cent, not the amount she announced previously.
The policy is however subject to an amendment of the VAT Act of 1994 by the National Assembly.
Spokesman to the Minister, Yunus Abdullahi, in a statement said the proposed increase was based on the recommendation of the presidential technical advisory committee.
He said on the committee was made up of economists from public and private sectors with the Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, that served as its chairman.
Abdullahi, said the committee, in its report, had recommended the increase in the VAT rate from five per cent to 7.5 per cent, adding that the prevailing VAT rate in Nigeria was still about half the African average.
"The proposed increase is subject to legislative intervention by the National Assembly who will have to amend the Revenue Act to reflect the proposed increase," he added.
Abdullahi, said the VAT exempts food, medicines and other basic necessities, thereby reducing the economic burden on the poor.
"The existing VAT Act exempts the basic necessities such as food, medicines and education, which therefore minimises the impact on the poor and vulnerable segments of the Nigerian society from the burden thereof," he said.
"The VAT increase, if correctly implemented, could bring in huge revenues, which would actually reduce the fiscal deficit burden."
Zainab, had pointed out that peer comparison on Nigeria's ability to convert Gross Domestic Product (GDP) to revenue for capital and social investment key drivers of sustainable economic growth showed that the country has 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.
To analysts at CSL Stockbrokers Limited, while there is the need for government to bridge its revenue gap, they stated that the proposed increase in VAT 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, they pointed out that one striking feature was the consistent decline in reported revenue, suggesting that consumer demand remains weak.
"In our view, 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.
"In effect, we see this as a fiscal policy designed to "rob Peter to pay Paul". We also expect that 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 Lagos-based firm maintained.
But analysts at Afrinvest Securities Limited, stated that the planned increase was primarily to support the finances of states as the new minimum wage of N30,000/month becomes effective.
"The increase in VAT rate is unsurprising as governments have been keen but civil protests have led to reluctance despite Nigeria's low VAT rate relative to peer economies. Nigeria's VAT rate at five per cent is the lowest among African peers such as Kenya (16%), South Africa (15%), Egypt (14%) and Ghana (12.5%)."
Similarly, VAT receipts to GDP is only 0.9 per cent of GDP compared with three per cent in ECOWAS and Commonwealth countries according to PwC.
"We note that Nigeria's effective VAT rate is believed to be significantly higher than the current five per cent due to the difficulty in claiming refunds, the high cost of compliance and non-allowable expenses for input VAT purposes.
"While we align with the age-long call to boost non-oil revenue, we believe the federal government has chosen an easy but less impactful route with the proposed increment in VAT. The increase should be part of a comprehensive fiscal reform package that would seek to boost collection efficiency, rein in recurrent spending, remove subsidies and widen the tax net," Afrinvest analysts added.
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 had 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 had 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.
"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," the firm stated.
Also, a former Lagos State Governor, Senator Bola Tinubu, had warned the federal government against increasing the VAT, saying doing so would reduce 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 had advised.
But Prof. Akpan Ekpo, who is the Executive Chairman, Foundation for Economic Research and Training, said there was 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.
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, there is need to expand the tax need, enforcement of appropriate sanctions on any agent who defaults in VAT collections and remittances as well as deploy technology to boost tax revenue.