Why new 7.2% VAT rate will kill businesses – Experts

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Zainab Ahmed
Zainab Ahmed

By Anayo Ezugwu

REACTIONS have continued to trail the proposed increase in Value Added Tax, VAT, from five percent to 7.2 percent by the federal government. Zainab Ahmed, minister of finance, budget and national planning, said the Federal Executive Council, FEC, has approved the new VAT rate. But she explained that the VAT Act has to be amended first by the National Assembly before the increase comes into effect.

Ahmed argued that the increment will enable states to generate more revenue in order to meet the obligations of paying the new minimum wage. “This is important because the federal government only retains 15 percent of the VAT, 85 percent is actually for the states and local governments and the states need additional revenue to be able to meet the obligations of the minimum wage.

“This process involves extensive consultation that needs to be made across the country at various levels and also it will involve the review of the VAT Act. So, it is not going to be implemented immediately until the Act is reviewed,” she said.

But financial and economic experts have faulted the move by the government. They believed that the timing was wrong, considering the current economic challenges in the country. Taiwo Oyedele, head, tax and corporate advisory services, PricewaterhouseCoopers, PwC Nigeria, said the new VAT rate would shrink the Gross Domestic Product, GDP growth and disposable income of Nigerians.

Oyedele said more people were likely to evade tax payment as businesses would become less competitive. He said at the current rate of five percent, the country’s VAT collection of N1.1 trillion in 2018 amounted to 0.9 percent of the GDP compared to about 3.8 percent for Commonwealth and ECOWAS countries. He alluded to the fact that the government would earn additional N440 billion annually from the 2.2 percent increase in VAT rate. But for Nigerian businesses, he said, this means 40 percent increase in VAT cost.

Oyedele noted that because VAT on capital expenditure was not allowed as a credit in Nigeria, the cost of real investments would go up. “Additional VAT revenue will help reduce budget deficits, reduce government debt and fund social services, especially at sub-national level,” he said.

To avoid the negative impact of VAT, Oyedele argued that VAT should be paid according to individuals’ ability as not everyone could afford a 7.2 percent VAT rate. He suggested other palliative measures, saying “exempt or zero rate for essential consumptions like foods, education and primary healthcare. The exemption should not be limited to only unprocessed food items. In other words, a VAT increase should not affect the price of bread.

“Create a VAT registration threshold to eliminate VAT compliance burden for small businesses. Allow businesses to account for VAT on cash basis rather than on invoice, which creates a cash-flow problem. Lead by example; ensure that government and all MDAs fully comply by remitting VAT collected from their contractors. Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure,” he said.

Like Oyedele, Adori Ochai, economic analyst, said the new VAT rate will be a dangerous move for small and medium enterprises, SMEs, in the country. He said the SMEs will have to pay more out of the little revenue they are making in form of taxes. “My challenge with the government is how do you increase taxes when infrastructures are not there? So why don’t you fix the infrastructure first before increasing the taxes.

“But it is a two way thing. If the government is sure that if the people bear the burden of the tax increase, the revenue will be invested in infrastructure fine. But when issues of electricity is still a major challenge in a country, why are you increasing tax, thereby making the people to bear more burden. Nigeria is a country where individuals generate their power, build roads, houses, provide water supply and also pay more tax. It will definitely kill a lot of SMEs.

“For the consumers, there is going to be inflation because producers knowing that tax has been increased by two 2.2 percent, will definitely increase prices at 2.2 percent. This means that a product that sells for N50 will now be increased by 2.2 percent across board. The producers will mostly not like to bear the burden alone, so they will pass it on to the consumers. In that case, the federal government has succeeded in reducing disposable income of households. And by the time this is done, it discourages savings thereby making the people poorer,” he said.

Going forward, Ochai said the government should focus on providing the infrastructure that would enable Nigerians to operate. “Let me not generate my power, water and provide security. Reduce all these cost for me, and then I can pay higher tax. Do the right things first by providing infrastructure then you can increase tax,” he said.

Likewise, the Nigeria Employers’ Consultative Association, NECA, joined other Nigerians in urging the government to suspend the proposed VAT increase.  Speaking in Lagos on Thursday, September 12, Timothy Olawale, director general, NECA, said the gains of the new minimum wage would be neutralised by the proposed increase in VAT.

Olawale said the increment would further reduce the purchasing power of the citizens, lead to increase in prices of goods and services, increase inflation rate, and further contraction of the economy. According to him, the recently released data of the country’s GDP growth indicated a contraction in the fourth quarter of 2018 (2.38 percent), first quarter of 2019 (2.10 percent) and second quarter of 2019 (1.94 percent).

“Also, International Monetary Fund has recently revised downward its global economic growth forecast to 3.2 percent due to sluggish global economy. Therefore, this suggests that at such period of time, economies should be formulating fiscal measures/policies to stimulate their economies,” he said.

– Sept. 13, 2019 @ 17:17 GMT |

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