VAT hike gamble: Bad timing, wrong target

Finance Minister, Zainab Ahmed

The National Assembly has finally approved N30, 000 as minimum wage, but the federal government is in dilemma on how to implement it. The dearth of funds to implement the new minimum wage was expressed last week in the Senate by Udoma Udo Udoma, Nigeria’s minister of budget and national planning. Udoma told the Senate that the federal government was poised to raise Value Added Tax (VAT) by 50 per cent or 2.5 per cent to 7.5 per cent to fund the new minimum wage.

Nigeria generated a total of N2.8 trillion in the last three years from VAT. That puts the nation’s average annual VAT revenue roughly at N900 billion.

If VAT is raised to 7.5 per cent, an additional N450 billion could be earned annually.

However, with the current sharing formula of VAT, it is doubtful if the federal government would raise enough money from the increase to fund the new minimum wage which slams an additional N12, 000 per low income worker on employers.

The federal government takes 15 per cent from VAT revenue, while state and local governments rake in 50 and 35 per cent, respectively. The proposed 2.5 per cent hike might raise Nigeria’s annual VAT revenue from N900 billion to N1.35 trillion. Fifteen per cent of that is about N202.5 billion.

Even if the proceed of the proposed VAT increase is enough to fund the new minimum wage, the consequences of the increase on the economy is rather too devastating to justify the quantum leap.

Besides, the timing of the proposed hike in VAT is perhaps the most tragic. It is a negation of the 2019 budget inflation target of 9.98 per cent. The new minimum wage on its own would almost certainly conjure a measure of hikes in the prices of goods and services as employers scramble to pass some of the cost to consumers.

The federal government would therefore be worsening a bad situation by raising VAT by 50 per cent. Inflation rate grudgingly climbed down to 11.3 per cent in February. However, the generals in the anti-inflation war room of the Central Bank of Nigeria (CBN) have openly confessed that inflation would rise to 12 per cent before it starts climbing down. That is a rather optimistic projection that has not factored in the consequences of the proposed increase in VAT. The World Bank and the International Monetary Fund (IMF) paint a grimmer picture of inflation surge in Nigeria for 2019. The IMF believes that inflation rate might hover around 13.5 per cent. Again, that projection might not have factored in the inflationary potential of the impending increase in VAT. With the proposed hike in VAT, inflation surge would therefore be triggered from two directions. The first would come from the federal government through VAT hike while the second would be triggered by the organized private sector through the passing of part of the cost of the new minimum wage to consumers.

In a worst case scenario, Nigeria’s unwieldy informal sector might even escalate the problem through transport fare hikes that would double the cost of commuting and evacuating food items from Nigeria’s isolated rural communities to the cities.

The inflationary trend in the economy is just too tense for the federal government to escalate it with an ill-timed increase in VAT. Government can earn more from VAT by expanding its scope rather than percentage hike.

Besides, VAT is the wrong target for revenue increase. Government has practically abandoned its largest source of income to the corrupt men in Nigeria Customs Service (NCS). The dollar value of Nigeria’s import duties revenue has plummeted from $4.9 billion in 2014 to $3.9 billion in 2018. No one in the federal government has lifted a finger in protest.

The NCS is celebrating revenue target of N1.2 trillion attained in 2018 even as the official exchange rate of the naira was devalued from N197 to the dollar in 2014 to N305. The customs calculate the import duties on goods at N306 to the dollar which is more than 40 per cent of the naira value in 2014. However, the increase in naira terms is infinitesimal.

Those who demand answers to the dwindling dollar value of Nigeria’s imports duties should go to Badagry on a normal day, lodge in a hotel on the expressway and wake up by 1am to count the number of trailers entering Nigeria from Benin Republic. They will be shocked.

Benin Republic’s Port of Cotonou makes more money than Nigeria’s major Port of Apapa.  That is because all the vehicles and rice consignments avoiding high import tariff in Nigerian ports are diverted to Cotonou and smuggled into Nigeria with the approval of NCS officials.

Statistics from the U.S. government shows that 3 million tonnes of rice was smuggled into Nigeria last year. At 70 per cent tariff, revenue from rice imports alone can fund the new minimum wage if the NCS is compelled to do its job.

Import duties from the 1.2 million vehicles that enter the country annually can fund the new minimum wage if government reverts to reasonable tariff that is easy to collect. The 70 per cent tariff on new vehicles has diverted so much money into the pockets of the government of Benin Republic and corrupt NCS officials.

If that money is redirected into Nigeria’s coffers, no one in the federal government would want to escalate inflation by hiking VAT.   

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