By KENNETH DARENG
VALUE Added Tax (VAT) ordinarily is seen by economic experts as vital and beneficial to the development of key sectors of the Nigerian economy either on the medium or long term basis.
However, the recent pronouncement by the Federal Government to increase between 6.75 percent and 7.25 percent VAT on goods and services across the country is being taken with a pinch of salt by many ordinary citizens. And has therefore elicited mixed reactions which has been termed by some as “anti-people’s policy.
The Federal Executive Council (FEC) of Nigeria on Wednesday, 11th September 2019, approved a 50% increase in the Value Added Tax (VAT) applicable on supply of goods and services in Nigeria. From 5% to 7.5% and the new rate is expected to take effect from next year.
It would be recalled that the Federal Government attempted to increase the VAT rate to 10% in 2017. But this faced opposition resulting in the suspension of the proposed increase.
However, recently, there have been discussions and sensitization by the tax authorities on the need for an increase in the current VAT rate. FEC’s approval of the proposal this time for the increased VAT rate is the latest of this development which according to a report by Deloitte Nigeria, the modality for amendment of VAT should have been through the Act of the National Assembly or by an Executive order. It further stated “In this regard, it is imperative to note that section 38 of the VAT Act empowers the Minister of Finance to amend VAT rate as well as the list of exempt and zero-rated goods and services in its first schedule.
“Thus, the Federal Government could make an amendment through an Executive Order, on the grounds that section 5 of the Nigerian constitution empowers it to implement an Act of the National Assembly.”
However the argument of some economic commentators is that, “It would be interesting to see the amendment route the Federal Government seeks to take” stated Mr. Tunji Adele, an economic expert.
Meanwhile, the Federal Executive Council has nevertheless stated that due consultations with relevant stakeholders would be carried out prior to the increase in the VAT rate.
The implication of the VAT increase as stated by a veteran columnist, Nosa James Ibinadolar is that, “The Federal Government is keen on making money and has decided that the people have to pay for it by way of increase in Value Added Tax (VAT) coming against the background of political and economic uncertainty occasioned by a long standing corruption, poor economic management and exacerbating budgetary financing “.
Choji Pwol, an Abuja based economist believes that while the increase in VAT could be in the interest of the economy, the current timing and increase is wrong and will lead to increased corruption and mismanagement particularly at the state and local government levels 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 to enable states pay for the increment. At best, the utilization of funds at the state level is heavily mismanaged and the states stand to gain the most for the increase, because they already collect 50 % of all VAT collection proceeds”.
Others who expressed their views to the SUNDAY STANDARD agree that from the simple economic point of view, any VAT increase would disproportionately affect the poor people in the society.
According to Mr. John Ismaila, a Jos based economist who expressed concern to the SUNDAY STANDARD, he lamented that “Even beyond the argument, the biggest challenge in this situation is that any increase in direct taxes affects the price of goods and services. This in turn would affect the country’s inflation rate especially with the present 11% inflation rate. And the outcome of the present increase is going to be very critical given the fact that the Central Bank of Nigeria (CBN) is keen to contain inflationary pressures in the economy. This is meant to bring back to a single digit within a target range of 6-9 percent. Therefore, it is thus expected that the hike in VAT would likely lead to a rise in inflation” adds Samaila.
While on his part, Taiwo Oyedele of PWC Nigeria aggrees that “Contemplating an increase in VAT rate now is bad timing and inconsistent with the current economic reality… VAT increase will lead to higher inflation, interest rate hike, and more unemployment and generally make people poorer. Any increase in VAT without a registration threshold and zero rating of basic consumption will increase the burden on the poor and also on the small and medium entrepreneurs (SMEs) contrary to the 2017 National Tax Policy.
“Trying to expand the VAT net while increasing the VAT rate at the same time is a faulty tax strategy. Nigeria can make twice from VAT at the current rate by reforming the law, expanding the net and evolving robust administration rather than by increasing the rate”.
Oyedele added that “In any case, the likely increase in revenue will not be sufficient to pay the new minimum wage.”
Pwol Choji shares the same view when he told THISDAY that the mismanagement of the Federal Government’s intervention and the looting of the Paris Club intervention by governors across the country was so blatant. “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 realized 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 the first quarter of 2020″.
However, in its review of the proposed VAT hike, the CSL stockbrokers concluded that the plan by the Federal Government to finance the increment in the wages of workers is a burden which will force companies to raise prices of goods and services significantly and ultimately placing the incidence of the tax increment on consumers. According to them, “In effect, we see this as a fiscal policy designed to rob Paul to pay Peter. 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.
Also sharing her thoughts with the SUNDAY STANDARD, an educationist residing at Rukuba Road Jos, Madam Beatrice Nabasu said “the proposed tax policies will also pose a downside for foreign investments in the Nigerian industrial climate as well as slow the growth of SMEs. By implication, companies that are unable to raise price might lay off workers in a bid to manage costs, further impacting on the present level of unemployment.
Most observers tend to suggest that it is understandable that government needs money, but introducing such measures at this point in time is quite unreasonable. Instead, the Federal Government should explore areas of its vast expenditure quipped Mr. Toba Ayoola, a student of Mass Communication with one of the tertiary institutions in Jos.
Ayoola also in his opinion told the SUNDAY STANDARD that “the government should know that the economy is very fragile at this moment owing to loss of speed in revamping our economy due to the level of insecurity and corruption in the system coupled with the over bloated political system which has rather made some people to feed fat at the expense of the poor masses.”
The decision by the Federal Government to undertake the VAT increase was unexpected as there had been murmurings in the recent past within the government circles. SUNDAY STANDARD gathered that the immediate past Minister of Budget and National Planning, Udoma Udo Udoma and the Executive Chairman of the Federal Inland Revenue Service (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 N30,000.00 per month approved by the National Assembly.
Fowler had held that the proposed payable VAT increment will be between 6.75 percent and 7.25 percent as against the 5% on all products in the country. This implied an increase between 35 percent and 50 percent. He added that the increment would affect the company income tax and the petroleum profit tax only.
Successive Nigerian governments have always insisted that the VAT rate being operated in Nigeria is one of the lowest in the continent.
But CSL stockbrokers suggest that there is need for government to bridge its revenue gap. They however fault the thinking that the increase in VAT would not lead to further economic scaring. 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 remain weak.”
A worker with the Plateau State Government who also spoke to the SUNDAY STANDARD under anonymity contended that “All along, I saw this coming due to the delay in the implementation of the N30,000.00 new minimum wage. It appears the government had no intention of meeting the workers demand as was tabled by the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC). It was just nothing but a political gimmick aimed at bettering the chances of the APC and that of President Muhammadu Buhari to win the 2019 presidential polls. It is my opinion that our labour leaders must come together to resist this daylight robbery”; he added.
According to its report, the business Insider publication had also in its report of 12th September 2019 criticized the VAT hike by the Federal Government. Noting that the VAT regime will apart from having a negative effect on the prices of goods and services, also trigger a severe inflation rate.
The report further stated that the increase in VAT rate will hurt the workers that is if the take home pay remains constant which will invariably affect the purchasing power of the average Nigerian and also impoverish individual income within the poor strata of the society.
Noting that, such a situation will affect market operations, mostly the formal sector and any hike will discourage consumption, meaning people will tend to buy fewer items in order to save cost and this will hurt business and also affect employees.
Robert Omotunde, Head of Investment and Research in Afrinvest said the country should rather do more at VAT collections instead of raising VAT rate. He said, “Nigerian economy is consumption driven and as at 2018, 73 percent of Nigeria’s GDP was made up of consumption expenditure. If government taxes this at 5% VAT, Nigeria should have earned N4.7 trillion in VAT but the country got N1.2 trillion instead,” he added.
International organisation such as the World Bank and International Monetary Fund (IMF) have consistently advised Nigeria to expand its tax net and channel the funds to developmental projects and budget funding.
In its report, Moody’s Investors Service (MIS) said the Nigerian economy will continue to expose shocks because the government has been unable to expand its tax net and non-oil revenue base.
The reality is that if this policy comes to fruition by way of increasing VAT, there is high possibility that all measures that would be put in place to cushion the negative effect may be counter productive. Most economic experts have warned against it and the repercussion that will follow especially in the face of growing poverty and inequality given the existing economic disparity in the country where there is already a high cost associated with the poor accessing economic opportunities. But then again, VAT will inevitably affect every body that spends money whether rich or poor.