A notice by Minister of Budget and National Planning, Senator Udoma Udo Udoma and Executive Chairman of Federal Inland Revenue Service (FIRS) Mr. Babatunde Fowler of government’s intention to raise the rate of value added tax (VAT) before the end of 2019 is presently causing ripples among various categories of Nigerians.
But experts have warned that such a move will further hurt the Nigeria’s economy and make the people poorer.
At a Senate hearing on 2019-2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) last Tuesday, served the notice on the lawmakers that in view of imminent wage increment stemming from increase in minimum wage from N18,000 to N30,000, the Federal Government intends to hike the current rate of value added tax (VAT).
Udoma recalled “that as a result of agitations from the unions that the President set up a tripartite committee to look at the Minimum Wage. Every five years, it is supposed to be reviewed. It has not been reviewed even though there is no doubt that for both the Federal Government and states; it is a tough time to review wages. But the N18,000 is really too low and it is difficult for people to live on N18,000. The President supported a revision but it is important that as we are revising (the minimum wage), we make sure that it can be funded that is why we set up the Bismark Rewane Technical Committee. So we will be coming to you. There may be some changes maybe in VAT and other things. But we will be coming to you in order to make sure that we can fund the minimum wage.”
On his part, Fowler told Senate Committee on Finance “I believe that by the end of this year, government and Nigerian people should be ready for an increase in VAT. A lot of Nigerians travel to Ghana and other West African countries and they can see that theirs’s much higher. They pay when they go for those trips. We should be ready for an increase in VAT. I can certainly see an increase in VAT of at least 35 per cent to 50 per cent this year based on our enforcement activities. There, certainly will be an increase in Company Income Tax and also on Petroleum Profit Tax.”
Although Udoma tied the plan to planned wage increment, talks about raising VAT rate in Nigeria has been perennial. As late as January this year, Minister of Finance, Mrs. Zainab Usman at the launch of the Strategic Revenue Growth Initiative in Abuja, targeted at improving revenue sources for government the move had become imperative as a result of the fiscal challenges the government is confronted with in providing infrastructure for its people.
“There will be a VAT increase. During the course of 2019, we will have clarity as to which items and what the rate will be and we will have to take a request to the National Assembly for amendment before it takes effect. “There is also going to be luxury tax. Already, there is luxury tax imposed on things like jets, yachts and few exceptional items that are classified as luxury and the Chairman FIRS will speak to that but we are contemplating increasing excise duties on carbonated drinks just like we have excise duties now on Tobacco and alcohol. But this is going to be a subject of study because we have to identify which ones will be affected and the best way in which to apply the taxes”, she stated.
However, in a fragile economy just returning to growth trajectory after a biting recession, discouraging consumption by increasing VAT may be counterproductive to the economy.
There has thus been a cacophony of voices against the move.
Governor of Ebonyi state, Mr David Umahi in criticizing the plan described the concept as digging a hole to fill a hole. “Today, I read in the papers where the federal government is lifting VAT from five percent to 35 percent to pay salaries. For me, it’s all about digging a hole to fill a hole. We have not come to the point of realization of how to solve our problems. So, if VAT is lifted from 5 to 35 percent which means that any of us going to buy anything will pay 35 percent more. So, no one should celebrate (election victories) yet. We are in for deeper problems all over the nation. No governor will make magic or President will make magic until we sit down to solve our problems. If they give us N2 billion and the wage bill is N2 billion, you cannot make any other magic. The most important thing we can do for civil servants is what I have done for you by giving loans to you”, he said.
Organised Private Sector (OPS) cautioned against the plan warning that it would hurt manufacturers, businesses and consumers alike. In a statement by Nigeria Employers’ Consultative Association (NECA), umbrella body for OPS and Voice of Business in Nigeria insisted that manufacturers and businesses were already saddled with so many challenges, such as infrastructural decay, power, among others. The statement by NECA’s Director-General, Mr. Timothy Olawale, said “the planned increase would erode the gains of minimum wage for low earners, and further weaken their purchasing power, among others. The planned increase of VAT will have far-reaching implications for manufacturers, businesses and consumers alike. Manufacturers and businesses are already saddled with several challenges, such as infrastructural decay, power, etc.
“Some companies are closing shops due to some of these challenges while others are still struggling to stay afloat. The proposed increase in VAT would definitely lead to an increase in the cost of doing business, and would likely be passed to the consumers whose purchasing power is already weak. Government does not have to increase VAT in order to enable it pay minimum wage. However, in the event that government must increase VAT against the will of the people, it should be limited to luxury or ostentatious goods only.”
He faulted the comparison of VAT rates with other countries as being irrelevant as business operating conditions in those climes are more clement than what obtains in Nigeria. “As a way out, OPS aligns with the recommendation of the Chairman of FIRS, Mr Babatunde Fowler that there should be more individual and corporate entities captured in the tax net paying VAT. Government should reduce its recurrent expenditure, cost of governance, widen the tax net in its bid to generate more revenue and ensure effective collection of taxes from non-compliant citizens or defaulters, etc. Government should not burden businesses with taxes, rather it should create an enabling environment for businesses to thrive and continue to contribute to the growth of the nation.”
Also, professor of Finance and Capital Market, Uche Uwaleke said raising VAT to meet salary needs obligations would end up being counterproductive, raising concern that it would lead to higher cost of goods in the country.
“Past experience has shown that a new minimum wage will not necessarily lead to higher inflation. In 2011 for example, when the wage floor 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. But if a new minimum wage can only be implemented by increasing taxes, then it simply amounts to digging a hole to fill a new one as the associated hike in the cost of goods and services will erode the purchasing power of any increase in wages.
“There is no doubt that the current VAT rate of 5 per cent is among the least in the world. However, It is equally true that many countries with a higher VAT rate have lower corporation tax. Ghana for example has a higher VAT rate of 14 per cent but a lower Company Income Tax of 25 per cent compared to Nigeria’s 30 per cent. Ditto for Egypt with a lower CIT of 24 per cent. Therefore, 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 will entail also 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 jeopardize government efforts at revamping the economy.
“Various reports by the National Bureau of Statistics have shown that inflation in the country is driven more by cost-push factors than demand-pull against the backdrop of weak aggregate demand. Therefore, if the VAT rate is increased without a corresponding reduction in CIT, it will further increase the cost of goods and services and worsen inflationary pressure. The CBN will be compelled to further tighten monetary policy resulting in high cost of funds for businesses. Many firms especially those producing items with elastic demand, will experience reduced sales as they may not be able to easily transfer it to their customers.
“This will lead to inventory accumulation, low capacity utilization, lower profits and downsizing of workers thereby complicating the unemployment challenge in the country. Moreover, reduced profits for companies quoted on the stock exchange will bring about reduced investments by these firms and depressed stock prices. In fact, an increase in VAT will lead to an increase in the cost of transactions in the capital market making it less attractive to investors.
“A major challenge with our tax system is low collection efficiency. In the case of VAT, a good number of tax payers who are supposed to be remitting VAT do not do so. I am in full support of implementing the new minimum wage without recourse to borrowing. The way forward is to devise means of improving the collection efficiency as well as widening the tax base as many eligible tax payers are still outside the tax net. To be able to implement the new minimum wage, the government should seriously consider ways of reducing the cost of governance and minimizing wastes in the public sector. This is the time to implement recommendations already made with respect to rationalizing government Ministries, Departments and Agencies in a manner that will also find productive engagements for those that will be affected by the exercise.
Also, head of tax at Pricewaterhouse Coopers (PwC) Nigeria, Mr Taiwo Oyedele urged the government to reconsider its options. “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.”
Although Nigeria has one of the lowest tax to GDP rates in the world according to official data with International Monetary Fund (IMF) saying its ratio of tax to GDP of 5.9 percent was, it already has one of the highest tax rates in the world. A global analysis of rates of corporate taxes would suggest that countries with low corporate taxes are doing economically better than their counterparts with higher rates.
A member of Chartered Institute of Taxation of Nigeria (CITN), Mr. Godwin Oloke said Nigeria charges one of the highest corporate taxes in the world at 30 percent. According to him, “Nigeria’s Companies Income Tax (CIT) is high at 30 percent. There is also the two percent Education Tax and one percent NITDF Levy. There is also the Capital Gains Tax if they dispose of their assets. These are in addition to indirect taxes like value added tax (VAT).”
Oloke, who is also a chartered accountant said “countries are tilting towards indirect taxes like VAT, which is consumption tax. They impose discriminatory consumption taxes such that those on luxury items are higher that on essential items and that way, high net worth individuals pay more taxes because they consume more. By lowering CIT, companies will have more money to operate instead of borrowing to expand their operations which is expensive in Nigeria. Companies can then produce more and ultimately hire more employees.
“Lowering CIT may also lure international investors who are always looking for countries where thay can pay lower taxes without violating any laws. Multinationals cite their companies in locations with lower tax rates. And when they come, they hire more workers thereby reducing unemployment and reducing poverty. This is a deliberate policy of some countries like UAE to lure investors and when investors come, other businesses also benefit like housing, hospitality, transportation, etc. Influx of businesses will also boost GDP and generally have a multiplier effect on the economy. In essence, it will be profitable for government to reduce CIT and other direct taxes but increase rate of indirect taxes especially on luxury items. Government should not maintain a regime of high CIT and high VAT,” he advised.
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