When the federal government announced that it would increase Value Added Tax (VAT) many Nigerians condemned the proposal out of fear that the increment would further impoverish the people. But is this really the case, BENJAMIN UMUTEME ask.
When the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed was mandated to brief State House correspondents after the Federal Executive Council (FEC) meeting, many thought it would be one of the usual kind of briefing but alas, it was not. She dropped the bomb when she announced that government would raise Value Added Tax (VAT) from 5 per cent to 7.2 per cent.
It was like a bolt out of the blues considering that in the past four years many Nigerians have had their standard of living drastically cut down.
She had hardly finished when it went viral on the internet that Nigerians would pay more for goods and services. Many wondered why the government would contemplating raising taxes when Nigerians were undergoing a rough economic time.
However, two days later, the Finance Minister in a statement to journalists stated that the increase was 7.5 per cent and not 7.2 per cent as earlier reported.
According to Mrs. Ahmed, the benefit of an increase in VAT will be more beneficial to state governments and Local Government Areas (LGAs) in the country, many of which are already facing difficult conditions.
The proposed increase in VAT is therefore expected to create additional fiscal space when it is eventually amended by the National Assembly.
VAT exempted goods, services
According to the Act, goods exempted from VAT payment are: all medical and pharmaceutical products; Basic food items; Books and educational materials; Baby products; Fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment.
Also, it includes: all exports such as plant and machinery imported for use in the Export Processing Zone; plant, machinery and equipment purchased for utilization of gas in down-stream petroleum operations.
Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes
Services exempted includes: medical services; services rendered by Community Banks, Peoples Banks and Mortgage Institutions; and plays and performances conducted by educational institutions as part of learning. The exemption further covers exported services.
In 2007, former President Olusegun Obasanjo increased VAT to 10 per cent on the eve of his departure from office but it was reversed by his successor, Umaru Musa Yar’Adua, following opposition from the Labour Unions.
Committee’s advice
The federal government took the decision to raise VAT following a recommendation by the Presidential Advisory Committee headed by Rewane Bismarck. One of the committee’s key recommendations to government was VAT increase from 5 to 7.5 per cent.
When it is eventually increased, Nigeria’s VAT rate will still be at about half African average and amongst the lowest in the world, thus sub-national governments get 85 per cent.
The existing VAT Act exempts the basic necessities such as food, medicines, and education, which minimizes the impact on the poor and vulnerable segments of the Nigerian society from the burden thereof. It is expected that the exemptions will be maintained in the VAT Act if it is amended.
“It is gladdening that the VAT increase, if correctly implemented, could bring in huge revenues, which would actually reduce the fiscal deficit burden.
“The government’s borrowing programme could then ease and certainly the financially affected states and local governments could later focus on issues like poverty reduction, healthcare and power generation and transmission.
“According to the industry experts, the VAT increase, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government across board,” the statement by the minister read in part.
No reversal, govt insists
Despite wide criticisms that have greeted both the VAT increment, the federal government has insisted that there is no going back on the new rate, arguing that the move was the most potent channels to meet the new minimum wage implementation.
The finance, budget and national planning minister at the public presentation of the MTEF 2020-2022 said that Nigeria was presently grappling with revenue constraints issues.
Govt wants to further emasculate the poor
In his reaction to the proposal, Young Otutu stated that while other countries were reducing VAT to stimulate their economies, the federal government was set to raise VAT.
According to him, “Nigeria 2019: VAT to 7.2 per cent; Tunisia 2018: from 20 per cent to 7 per cent; Ghana in 2017: from 17.5 per cent to 3 per cent, and Egypt 2019: proposed reduction to 5 per cent.
“All over the world economies are cutting down VAT to stimulate economic growth. But the Nigerian government is doing the opposite because it has no ideas. Government wants to further emasculate the poor’
Similarly, Civil Societies Organisations (CSOs), financial experts, public affairs analysts have also come out to condemn the move stating that it is further plan by the ruling class to emasculate the already impoverished Nigerians.
They said the government was not being sensitive as the proposed increase was coming at a very wrong time.
Analysts have also questioned why the government proposed 9.5 per cent increase in minimum wage while following it with a 7.5 per cent increase in VAT when the economy was facing double digit inflation.
According to them, economic condition and the level of poverty in the country should have been considered before the government took the decision.
Increase coming at wrong time
For the Executive Secretary, Consumers Rights Project Mr. Uche Onu the timing of the increase in VAT was coming at a very wrong time.
According to him, the average Nigerian was grappling with so many issues on several fronts, therefore adding raise in VAT would further affect the consumers who are the bottom of the production ladder.
“As the scriptures say, there is time for everything under the sun. We have a culture in Nigeria that anytime we want to something in government circle we compare ourselves with other climes, but when it comes to infrastructure development they seem to look the other side. Everything stops at the desk of the consumer. Looking at what is happening in the electricity sector, and the minimum wage issue that continues to grab, and they are still trying to emasculate the consumer,” he stated.
It’s putting the cart before the horse
Speaking on the same vein, a public policy analyst Dr. Joe Abah believes the government is putting the cart before the horse.
“At 5 per cent, Nigeria has one of the lowest VAT rates in Africa. However, I am not sure that the timing of this proposed increase is the best. People are struggling. For now, it would have been better to widen the tax net and target luxury goods, so that the poor doesn’t suffer more,” he added.
Reacting to the proposal on his twitter handle @BBoason, financial analyst, Boason Omofaye said ultimately, the middle class and the poor will fund the lifestyle of the rich.
He said: “The government has found it nearly impossible or difficult to implement the Luxury Goods Tax otherwise known as the Wealthy Tax which was floated during GEJ and adopted by current administration in its 1st-Term.
“The last that was reported was a few billions of Naira gotten from private aircraft parking tickets or so…now the man-on-the-street will have to bail out the big boys via VAT at 7.2 per cent.”
Policy, short time solution
Speaking on his twitter handle, Usman Hassan Tukir said “We have a notorious habit of always choosing a simple short-term “solution” for a complex longer-term based problem. Taxing luxury goods & expanding the tax net is more complex than simply slapping the compliant tax payer with a heavier burden. SMH.. troubling times ahead.”
Analysts continue to view VAT rate increase as inconsistent with current economic realities especially as the country is yet to fully come out of the recession woods which was largely occasioned by the oil slump of 2015 lead to a huge fall in revenue.
A closer look at market operations have revealed that an increase in VAT would affect the formal sector as it would discourage consumption (People will tend to buy fewer items to save cost). This would hurt businesses and affect employees.
… Threat to entrepreneurs
Executive Vice Chairman of Famfa oil and richest woman in Africa, Folurunsho Alakija, couldn’t agree less when she described the planned increased as a threat to entrepreneurs in the country.
Alakija noted that the proposed VAT increment if fully implemented would make life difficult for entrepreneurs that operate within the shores of the country to make money.
“Increasing VAT will make it more difficult for entrepreneurs to be able to make as much money as they would have liked to. But it is also what the government needs for nation-building, because it is tax that the government earns as income. Without tax, no government can really stand on its legs. So long that it is being ploughed back into the areas where they are needed, and they are not growing wings.”
Over the years, successive governments have always insisted that VAT rate is one of the lowest in the continent. CSL Stockbrokers opined that an increase in VAT would further leave economic scar on many Nigerians.
“It may further worsen the living conditions of consumers whose real income have been stifled over recent years. Looking at the performance of consumer goods companies over the past 18 months, one striking feature is the consistent decline in reported revenue, suggesting that consumer demand remains weak.”
As it is now, Nigerians pay a lot in taxes, especially in the informal sector with many holding the view that the unwillingness of government officials to remit taxes still remained a major challenge.
For mama Udoh, who is a trader in Nyanya market in the FCT, the proposed increase will not be good for business.
She told Blueprint Weekend that despite the assurance by government officials that the increase will not affect the poor, her experience over the years as one that interact with people has shown that the opposite of what the government said is going to happen.
“You know that in Nigeria when there is an increase in one thing it affects every other thing,” she said.
Shifting the goal post
For public affairs analysts Hassan Ola has said that there won’t be a better time to do the increase than now.
“We have been shifting this for years now. Will there ever be a time people won’t complain about any new government policy? We need to widen tax net and also increase VAT. We need to fund our budget from IGR only.”
Concurring, the Auditor-General for Federal Capital Territory (FCT) Area Councils, Hajia Kudirat Abdul-Hamid, said the proposed increase in the country’s VAT would ensure national and economic development. According to her, the increase was long overdue.
“It is long overdue considering that in the five largest economies in Africa, Nigeria’s VAT is the least, it had been five per cent when we have other countries charging between 15 per cent and 20 per cent.
“But for the reaction of the public in the past, it would have been reviewed, but we cannot continue to run away from this if we must build our economy.
“The increase in VAT has come maybe as a shock or surprise to people, but the truth is that it is a consumption tax paid by people who consume a particular service or commodity,’’ she said.
Increase, right move
Speaking on the increment, the President of Chartered Institute of Taxation (CITN), Olajumoke Simplice, said it was a right move in the right direction stating that the action of the government should have come much earlier.
The CITN president explained that VAT is a tax on goods and services consumed.
“It means that if you do not consume that goods or service you are not going to pay. That is why even in the VAT Act you have exemptions.
“Nothing stops you from giving your wife N10,000 to the market to buy what you. But, when you look at your wife, and say beautiful woman let’s go to Transcorp Hilton hotel to eat, you pay VAT on the same food that your wife should have cooked at home,” she said.
Going forward
For a private sector operator, who simply referred to himself as Flex Dada, the government has been lazy in exploring other option of taxation instead preferring to focus on VAT increase.
According to him, the government needs to be creative.
“The government is lazy for not widening the tax net; they need to develop critical sectors to raise more tax that is tourism. They need to cut down cost of governance, what happens if they are still unable to fund budget in the next few years, VAT increment again,” he queried.
Tax should target luxury goods
According to Kling Dayok targeting luxury goods for such taxes was better instead of increase in VAT.
In a message on his Twitter handle @Olufemi, suggested a “cut in cost of governance to the barest minimum, reduce income tax rate, then marginally increase VAT.”
Nobody has said there should not be increase in taxation but there should be a corresponding increase in productive services on the part of the government.
“We have to cut cost of governance. Most of these government officials are making unnecessary appointments. You see a state have up to 46 commissioners, what they are doing with them,” Mr. Onu asked.
Similarly, Mrs. Simplice advocated that Nigeria should move from direct to indirect taxes. She said that it should be “what you consume that is what you pay for.”
