How far can Nigerian companies, consumers cope with heavy tax burden?

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Goddy Ikeh

THE members of the Economic Advisory Council may have to urgently wean the government from the current recourse to raising taxes at will in the face of harsh economic environment since it is bound to not only increase the burden of doing business in Nigeria, it will have negative consequences on the economy.

By Goddy Ikeh

Before the current tax drive for more revenue for the federal government, there has been this notion that the government relied largely on crude oil and gas sales for its revenues and that very little revenue is generated from taxation.

This notion must have contributed to the myriad of endless taxes being imposed by the government recently.  But a quick check shows that the taxes and levies imposed on every company incorporated in Nigeria include Companies Income Tax, the Capital Gains Tax, Withholding Tax, Personal Income Tax, Stamp Duty, National Industrial Training Fund, NITF, Employees Compensation Scheme, The Tertiary Education Trust Fund, TETFUND and National Housing Fund Contributory Pension Scheme.

Others are Customs Duties, Tenement Rates/Land Use Charge, Business Premises Registration Fees, Town Planning and Building Permits, Infrastructure Maintenance Charges, Signages and Mobile Advertisement, Aviation Clearance Permit Fees and Environmental Impact Assessment/Audit fees.

These taxes and levies did not include the 5% Value Added Tax, VAT, which is due to be raised soon to 7.5% and the numerous bank charges announced recently by the Central Bank of Nigeria.

Unfortunately, these taxes are responsible for the high cost of services and goods produced in Nigeria and consequently these costs are passed on to the consumers.

With this high level of taxation and the fact that these companies are required to provide such basic infrastructure as power, water, roads and security for their operation will ultimately make their products uncompetitive.

Some industry stakeholders have criticized this tax structure, warning of the negative consequences on the Nigerian economy.

Muda Yusuf
Muda Yusuf

For instance, the Director General of the Lagos Chamber of Commerce and Industry, LCCI, Muda Yusuf, said recently that the Nigerian tax structure was not investment-friendly and that “the Federal Inland Revenue Service has scant regard for due process in its drive for revenue”.

“It is, therefore, inherently a disincentive to investment and economic diversification,” he said.

Speaking at the sidelines of the just concluded 74th United Nations General Assembly in New York, Alhaji Aliko Dangote, blamed the Nigerian tax structure for scaring away potential foreign investors, who according to him,  flock to neighbouring Ghana as the preferred investment destination because of that country’s lower and favourable tax regime.

Writing on Recent tax changes in Nigeria, Shehu Mustafa and Chukwuka Ikwuazom of the Aluko & Oyebode Law firm, warned of the immediate impact of the administration of these new taxes on businesses as well as possible ripple effects on the economy at large.

They noted that the federal government has in recent times, taken steps to review and introduce notable changes to the existing tax system. The changes include the introduction of a new Value Added Tax, VAT. rate which has been approved by the Federal Executive Council, the signing into law of the Police Trust Fund (Establishment) Act, as well as ongoing deliberations by the Federal Government to impose VAT on online transactions.

Aliko Dangote
Aliko Dangote

According to them, more recently, the Central Bank of Nigeria as a step towards the nationwide implementation of the 2020 cashless policy, has imposed charges on bank withdrawals and lodgements above specified thresholds by individuals and corporate entities, in addition to already existing charges on withdrawals. The implementation of the imposed charges on bank cash withdrawals and lodgements is effective September 18, 2019.

For the duo, the newly approved VAT rate, the police trust fund levy and the administration of these new taxes will surely impact on businesses and have ripple effects on the economy at large.

Aside the existing tax structure, the planned increase in VAT rate and the planned nationwide implementation of the 2020 cashless policy and the imposition of charges on bank withdrawals and lodgements above specified thresholds by individuals and corporate entities have attracted reactions from some stakeholders.

Explaining the proposed increase in VAT, from five percent to 7.5 percent by the federal government. Zainab Ahmed, minister of finance, budget and national planning, said that 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.

Zainab Ahmed
Zainab Ahmed

“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 reacting to the hike of VAT rate, Shehu Mustafa and Chukwuka Ikwuazom noted that the federal government is projecting a revenue of over N2 trillion in 2020 from the hike in VAT rate from 5% to 7.5%. They, however, observed that the hike in VAT rate represents a significant increase in costs of goods and services as well as a huge cost to consumers who are at the receiving end of the value chain.

In the same vein, some financial and economic experts have faulted the planned hike in the VAT rate 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.

Taiwo Oyedele
Taiwo Oyedele

According to Oyedele, more people are 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 7.5 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.

In addition, Adori Ochai, economic analyst, said the new VAT rate would be a dangerous move for small and medium enterprises, SMEs, in the country. He said the SMEs would 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.

The Nigeria Employers’ Consultative Association, NECA, also lent its voice to the issue and urged the government to suspend the proposed VAT increase.  Speaking recently in Lagos, Timothy Olawale, director general, NECA, said the gains of the new minimum wage would be neutralised by the proposed increase in VAT.

Timothy Olawale
Timothy Olawale

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.

While the argument on the futility of raising taxes in the face of harsh economic environment rages, the government should realize that the imposition of these endless taxes and levies at will would certainly increase the burden of doing business in Nigeria and scare away foreign investors from the country.

 

-Sep 29, 2019 @17:05 GMT |

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