Nigeria: Analysts Back Proposed VAT Hike, Fault Timing

18 September 2019

Abuja — Some economic experts have expressed mixed reactions on the proposed hike on Value Added Tax (VAT) from five per cent to 7.5 per cent.

The Federal Executive Council (FEC) had at its weekly meeting in Abuja had last Wednesday approved the proposed increase, which is subject to implementation after the amendment of the VAT Act by the National Assembly.

However, in separate interviews with THISDAY, a former Deputy Governor of the Central Bank of Nigeria (CBN) and presidential candidate of the African Democratic Congress (ADC) in the 2019 general elections, Dr. Obadiah Mailafia and the Lead Director, Centre for Social Justice (CSJ), Eze Onyekpere expressed divergent views on the timing of the proposed hike.

According to Mailafia, for many years, the International Monetary Fund (IMF) had been calling for an upward review, which is the government had been reluctant about.

He stressed that the federal government may have been heckled by the current revenue squeeze.

Mailafia, who is a development economist noted: "I suppose the deciding factor is the revenue constraint that is now beginning to bite hard.

"The budget deficit continues to expand even as government is finding it increasingly hard to balance the budget. Our debt profile recently reached the staggering figure of N24 trillion (about US$70 billion).

"A huge chunk of revenues are going into debt servicing. So, government seems compelled to explore ways of boosting revenues to ensure solvency in terms of government business."

While not opposing the impending hike, he expressed concern on the timing, saying economic recovery was still fragile.

"My only concern is that the timing is wrong. We are still in an iffy recovery. We would be lucky to attain two per cent at year end 2019. In such a weak growth environment, the received wisdom is to lower taxes, not increase them. You don't want to kill the golden geese that lay the eggs," he added.

He noted that from simple economics, when there is a raise in VAT rate, the inclination is that consumers would cut back on their purchases of goods and services, adding that in a weak business environment, that is likely to lead to a fall in aggregate demand, which in turn will weaken the economy further.

Mailafia, said he would have preferred the optimisation of the entire tax administration framework to ensure that all those who are outside the loop are fully integrated.

"I suspect that only the top and well established corporates get to pay VAT. A huge chunk of it goes uncollected. So let us work more rigorously on tax administration before we look into possible increases," he added.

He admitted that Nigeria's VAT collection was quite low by the standards of its peers and neighbours, noting that Ghana recently reduced theirs from 15 per cent to 12.5 per cent while neighbouring Francophone countries have a VAT rate of around 18 per cent. He added that while Nigeria's

VAT rates are comparatively modest, corporate tax rate at 30 was among the higher levels, adding: "What we need is balance, prudence and pragmatism. The biggest task before this administration is creating a strong and competitive business environment where markets flourish.

"The environment of today is harsh and nasty for business. The focus must therefore be on how to build up businesses and ensuring prosperity before we think of how to tax firms and consumers in order to boost revenue."

In his contribution, Onyekpere welcomed the planned hike in VAT, saying it would increase available resources for budget implementation and development across the three tiers of government.

He, however, advised that the additional revenue to be realised from the increase may not be substantial if the tax authorities do not take concerted and targeted steps to increase the number of natural and artificial persons who will pay the new VAT.

"The way forward is to ensure that all persons liable to VAT, collect and remit the same to the appropriate authorities.

"While we take note of the arguments about the harsh economic conditions and how the increase will impose hardship on the poor, we note that all Nigerians ought to make sacrifices considering Nigeria's parlous fiscal condition.

"Indeed, Nigeria is facing a fiscal crisis which ideally, the leadership should explain to Nigerians instead of the current official attitude that all is well.

"These hard times call for increased fiscal transparency and accountability on the part of government which manages public resources.

"But governments all over the world are known to revel in opacity. It is therefore our duty as citizens, as we pay this new increased VAT to demand utmost accountability and transparency from our leaders," he admonished.

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