Finance Act: Buhari digs in on taxes

Mon, Feb 3, 2020
By publisher
6 MIN READ

Economy, Featured

Despite the belief that the new Finance Act will promote fiscal equity, align domestic laws with global best practices and support Micro, Small and Medium-sized businesses, the hike in VAT rate is one of the obvious negative  provisions of the Act

By Goddy Ikeh

THE new VAT rate of 7.5%, which is one of the controversial provisions of the new Finance Act 2019, became operational on Saturday, February 1, 2020. Despite the acceptance of the Finance Act by some members of the business community and stakeholders, the hike in the VAT rate from 5% to 7.5% has been seen as one of the negative provisions of the Finance Act.

Speaking on Saturday, February 1, in an interview with the Federal Radio Corporation of Nigeria, FRCN, on the take-off of the new VAT rate, the director general of the Lagos Chamber of Commerce, LCCI, Muda Yusuf, faulted the hike, saying that it was another burden to businesses that have been over burdened with up to 10 different taxes and levies by various government agencies.

Yusuf told the FRCN that the idea of extending VAT to cover raw materials and the power sector is untenable and will add to high production costs which will be passed on to the consumers.

But in her defense of the hike in the VAT rate, which was widely criticized by the business community because of its effect on prices of goods and services, the Minister of Finance and National Planning, Zainab Ahmed, said that the VAT increase would help government achieve its revenue projections for the 2020 budget and that it was part of the tax reforms included in the 2019 Finance Act.

She explained that with the Act, there would be more revenue to finance key government projects, especially in the areas of health, education and critical infrastructure.

Speaking in the same vein, the Vice President, Prof, Yemi Osinbajo, said that several basic food items, locally manufactured sanitary towels, pads and tuition relating to nursery, primary, secondary and tertiary education had been added to the exemption list of goods and services on the VAT under the Finance Act 2019 in a bid to ensure that the cost of living did not rise for Nigerians because of the changes in VAT.

According to Osinbajo, amongst other benefits, the law will consolidate efforts already made in creating the enabling environment for improved private sector participation and contribution to the economy as well as boost states’ revenues.

Osinbajo also noted that the Finance Act will support the funding and implementation of the 2020 Budget, promote fiscal equity by mitigating instances of regressive taxation; reform domestic tax laws to align with global best practices; introduce tax incentives for investments in infrastructure and capital markets; support Micro, Small and Medium-sized businesses in line with the administration’s Ease of Doing Business Reforms and raise revenues for Federal, State and Local Governments.

In his assessment of the investment environment in the country, President Muhammadu Buhari said that the federal government would provide the enabling environment for businesses to thrive in the country.

Receiving the Chairman, MTN Group, Mcebisi Jonas, at State House, on Tuesday, January 28, in Abuja, Buhari said that the federal government was committed to providing an enabling environment for businesses to succeed, as partnerships between the public and private sectors has remained the most viable means of bringing prosperity to the masses.

“I am pleased to hear of the progress you are making in Nigeria, especially in supporting our digital inclusion programs. Your proposed projects, such as the rural telephony project, will surely complement our economic diversification and financial inclusion programs by connecting the producers based in rural areas to consumers located in our major towns and cities,” the report by Channels Television quoted Buhari as saying.

He said the government was looking at ways to increase the level of security across critical national infrastructure, noting that it would guarantee seamless service delivery and also facilitate investments across the country.

Buhari noted that Nigeria is Africa’s largest telecommunications market, and MTN’s largest market, adding: “Our hope is for operators like MTN to continue to focus on delivering quality service at reasonable prices. If we put our minds together, such win-win positions are achievable.”

Despite the anticipated benefits of the Finance Act, some analysts believe that the Act is mostly driven by revenue motives and that it will lead to further increase in inflation, which is already at 11.98 %. Although the LCCI commended the federal government on some of the expected positive impacts of the Finance Act, its Director-General, Muda Yusuf, however, expressed concern over the provision on minimum tax, saying that it was inappropriate to compel loss-making firms to pay tax, no matter how little.

According to him, this amounts to erosion of capital for such businesses.

Apart from the impact of the Finance Act on the economy this year, some analysts believe that it was the fear of a further spike in inflation regime that forced the Central Bank of Nigeria, CBN, to undertake a moderate tightening stance, leading to the raising of the cash reserve ratio, CRR, by 500 basis point, from 22.5 percent to a new level of 27.5 percent.

According to them, the move to mop up liquidity surfeit in the Nigerian economy, may defeat the objectives of the Finance Act, which is targeted at assisting the growth of SMEs since it may lead to high cost of funds. Another criticism of the Act is the increase in stamp duty on receipts to ₦50 on every transaction from ₦10,000 and above and the expansion of the definition of receipt to cover electronic transactions. This gives a legal basis to what is already being practised by Nigerian banks, but raises the threshold to N10,000 from N1,000. It, however, failed to address the controversy on stamp duty administration by FIRS and NIPOST.  And subjecting certain imported goods to excise duties similar to locally manufactured goods will also raise the prices of these goods.

Unfortunately, the positive objectives of the Finance Act in the area of supporting Micro, Small and Medium-sized businesses may not be realized if the issues of lack of stable power supply, multiple taxation, high cost of funds and security of lives and property and not urgently addressed.

Certainly, this is where the CBN’s development financing is needed. It should extend finance to various sectors of the economy, especially the industrial sector in order to promote the growth of the economy in a holistic manner, this has been achieved by the apex bank in agriculture. The other sectors are expecting such intervention from the CBN.

– Feb. 3, 2020 @ 10:55 GMT |

A.I

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