Why Nigerians reject VAT increase

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Nigerians from different walks of life warn that increasing the value added tax will create more hardship for them

By Emeka Ejere

BOLA Tinubu, the national leader of the All Progressives Congress, APC, must have spoken the mind of many Nigerians when he recently warned against a move by the federal government to increase value added tax, VAT.

Tinubu, who spoke at the 11th Bola Tinubu Colloquium, marking his 67th birthday in Abuja argued that increasing VAT now would reduce people’s purchasing power and further slowdown the economy.

The federal government had hinted an imminent increase in VAT when Udoma Udo Udoma, the minister for Budget and National Planning and Babatunde Fowler, the executive chairman of the Federal Inland Revenue Service, FIRS, engaged the Senate Committee on Finance on the Medium Term Expenditure Framework, MTEF, and Fiscal Strategy Paper, FSP.

The proposal, which increases VAT by 35% or 50% from the current 5% to either 6.75% or 7.25% according to Udoma and Fowler, is to enable the federal government pay the N30,000 new minimum wage approved by the National Assembly.

VAT is a tax levied on goods and services consumed. It is an indirect tax wherein the burden of the payment is borne by the final consumer of the goods and services. The tax was created by the VAT Act No. 102 of 1993 which became effective from January, 1994.

The tax is collected only by FIRS at the rate of 5% of the value of the goods and services supplied. The VAT rate in Nigeria of 5% is said to be among the lowest in the world and has remained unchanged from commencement of the Act till date.

From inception to date, the tax has proven to be a strong source of revenue to the government. Consequently, few attempts had been made to push up the rate to about 10% but were resisted the masses.

Expectedly, the recent proposal suggesting upward review of VAT elicited divergent reactions from various sections of the society, including economic experts. Tinubu said instead of increasing VAT in this moment of economic upheavals, the government 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. His views made a high grade in popularity test.

Uche Uwaleke, a professor of Finance and Capital Market, said the planned hike in VAT to fund the new minimum wage would end up being counterproductive, raising concern that it would lead to higher cost of goods in the country.

In 2011, when the minimum wage was increased from N7,500 to N18,000, average inflation rate actually dropped from 13.7 per cent the previous year  to 10.8 per cent.

Uwaleke argued that “if a new minimum wage can only be implemented by increasing taxes, then it simply amounts to digging a hole to fill another one as the associated hike in the cost of goods and services will erode the purchasing power of any increase in wages.”

Uwaleke said any increase in VAT can be productive only if it is part of a broad fiscal strategy of rebalancing the tax mix in favour of consumption tax which would also entail lowering the company income tax.

“Doing otherwise in an economy that is grappling with double-digit inflation, weak growth and high unemployment rate will cause more distortions and jeopardise government’s efforts at revamping the economy,” he stated.

Putting things in perspective, Taiwo Oyedele, the head of tax at Pricewaterhouse Coopers, PwC, revealed that the average VAT collection in the past six years is about N900 billion. The revenue is shared 15% to the Federal Government, 50% to states and 35% to local governments net of 4% cost of collection to FIRS.

He said if the rate is increased by 50% (all things being equal) “we will generate on average an additional N450 billion annually. Less 4% cost of collection to FIRS, all 36 states will get 18 billion per month translating to an average of N500 million per state.”

According to him since Lagos, FCT, Rivers, Kano and Kaduna generate 87% of VAT revenue, they also share a big chunk of VAT revenue, meaning that the financially disadvantaged states will 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.

Contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality. VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer.

“Any increase in VAT rate without a registration threshold and zero rating of basic consumption will increase burden on the poor and SMEs contrary to the 2017 National Tax Policy.

“Trying to expand the VAT net while also increasing VAT rate at the same time is a faulty tax strategy. Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring robust administration rather than by increasing rate.” 

For Aruna Kebiraa stock broker and market analyst, the plan by government to increase VAT by 50%, following increase in national minimum wage is tantamount to robbing Peter to pay Paul:

‘‘Following the increase in national minimum wage from N18000 to N30000, I think plans to hike VAT tax is like giving with the right hand and taking with left hand from Nigerian workers”, he said.

‘‘The implication of this is that the Nigerian workers will be at the receiving end. Such action would erode the economic benefits that could have accrued to consumers and the economy in general. The increase will also make savings difficult for the workforce, as the price of goods and services would go up.”

Kebira also argued that the increase could lead to substitution of consumer goods, as consumers of manufactured food items might be forced to seek alternative, in the event of high food prices. He said he does not envisage that the VAT increase would have any significant effect on the capital market.

David Imafidon Adonri, also a stock broker and market analyst, explained that VAT is a form of tax used by government, just like any other tax, to reduce consumption level of its citizens.

‘‘But reducing consumption at this time, when the economy is in bad shape can further hurt the economy”, he argued.

“I think this is not the right time to increase tax. For the capital market, it is a disincentive to investment, as investors’ savings will reduce, particularly those of fixed income workers.

‘‘In my opinion, this additional tax burden, coupled with already heightened administrative expenses would undoubtedly tighten profit margins for businesses.

“Furthermore, the increased minimum wage could predicate possible layoffs of workers because of the higher labour cost. Overall, I’m of the opinion that the FG should implement pro-market policies to cushion the likely negative effect of the bill on the ease of doing business in Nigeria.”

Already the euphoria among workers over the passage of the N30, 000 minimum wage by the Senate last month seems to have been muffled by the proposal for the Federal Government to increase VAT to enable it implement the new wage.

Angered by the proposal, both Organised Labour and the Organised Private Sector, OPS, have warned of the dire consequences of the action should the government go ahead with it.

The Organised Labour sees it as insincerity on the part of the government to pay the new wage by using VAT as a trump card, pointing out that the hike in VAT would further impoverish the workers as they would have to pay more for goods and services without a commensurable income.

The Nigeria Labour Congress, NLC,  pointed out that the increase in VAT would be counter-productive, arguing that the proposed new wage is quite minimal to have warranted any tax increase.

Peters Adeyemi, the vice president of NLC, warned that government should not contemplate increasing VAT lest it meet with the wrath of the workers.

 

-Apr. 12, 2019 @ 06:00 GMT |

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