VAT increase: To be or not to be?

When the news came that the federal government planned to increase Value Added Tax (VAT) from its present 5 per cent, many are of the view that  any increase in VAT will spell doom for businesses, BENJAMIN UMUTEME reports. 

Many Nigerians woke up to be confronted with media reports that the federal government was planning  to increase Value Added Tax from its present 5 per cent to between 30-50 per cent.

While many say the country’s tax law was overdue for review, they argue it is proper for the government to firstly review the law before any increase is implemented. 

According to the crafters of VAT, it is meant to provide support for the needy, not hardship on them, therefore, many were miffed when the report on proposed VAT increase broke.

It is pertinent to note that 85 percent of VAT collected in Nigeria is shared among states for them to provide free education, free health services, provide basic amenities among others.

VAT       

The standard VAT rate on goods and services in Nigeria is 5 per cent, which is regarded as the lowest in the Economic Community of West African States (ECOWAS) and sub Sahara Africa.

The rate is expected to increase to about 15 per cent in the near future to ensure harmonisation with other countries in the region in line with the approved National Tax Policy focus on indirect taxation.

The scope and coverage of VAT is extremely broad and applies to all imported, supplied or manufactured goods and services in Nigeria, except those that are specifically listed as exempt or zero-rated.

VAT is substantially invoice-based and therefore tends more towards accrual basis. VAT payable is the difference between VAT charged on supply of goods and services (output VAT) and VAT incurred on purchases or imports meant for direct resale (input VAT). VAT incurred on fixed assets, general overhead and services is not claimable but may be expensed or capitalised as the case may be.

Only a few items are exempted from VAT in Nigeria. These include exported services, medical and pharmaceuticals products, basic food items, baby products, medical services, plays and performances conducted by educational institutions as part of learning, and materials and equipment imported for use in downstream gas activities.

Suppliers of exempt goods are not required to charge VAT on their sales and cannot claim input tax for VAT paid on their purchases.

Non-oil exports are zero rated for VAT purposes. Goods and services for use in export processing zones (EPZs) or freeport zones are not liable to VAT on the basis that these zones are outside the scope of Nigerian VAT rules.

FIRS debunks plan

Meanwhile, the Federal Inland Revenue Service (FIRS) has came out to deny the rumour, saying there was no plan by the government to increase VAT.

A statement by head, communication and servicom department of the service, Mr Wahab Gbadamosi, says contrary to reports in the media, the FIRS chairman only called for a reduction in Companies Income Tax (CIT) rate for small businesses so as to improve compliance.

“Though he indicated that there should be an increase in VAT rate by the end of the year, he never for once suggested a 50 per cent hike of any percentage increase at all.”

Should government increase VAT rate?

To put things in perspective, the average VAT collection in the past 6 years is about N900 billion. The revenue is shared 15% to the federal government, 50 per cent to states and 35 per cent to LGs net of 4 per cent cost of collection to FIRS.

 If the rate is increased by 50 per cent (all things being equal) we will generate on the average an additional N450 billion annually. Less 4 per cent cost of collection to FIRS, all 36 states will get 18 billion per month translating to an average of N500 million per state. Since Lagos, FCT, Rivers, Kano and Kaduna generate 87 per cent 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.

Diminishing Nigeria’s competitiveness

A lecturer in the department of economics and statistics, University of Benin, Prof. Hassan Oaikhenan, cautioned the federal government against increasing the VAT as a means of funding the proposed new minimum wage for workers in the country.

Oaikhenan believed the policy would result in increase in general price level and also reduce the competitiveness of locally manufactured products in the international market.

He want the federal government to look away from the attractions of VAT increase and be more creative in ways of generating revenue to fund the wage increase.

The varsity don believed additional value of the increase in workers’ income would become marginal or totally eroded by inflation if the policy was implemented.

“It is common economics that when VAT is increased, those VATable products will become more expensive, we can no longer export those we used to and consumer here will prefer their foreign alternatives which is now cheaper.

“Smuggling will become more prevalent because of demand for these cheaper foreign goods; the current five per cent VAT rate is significantly impacting on general price level already.”

 Also faulting the move,  capital market experts say its implementation would further depress stocks’ price and increase transactions cost in the bourse.

 Chief Executive Officer of Crane Securities Limited, Mike Ezeh, explains that “when investors’ patronage on the market is reduced, we will start seeing a free fall in the share prices of companies. Of course, this will impact negatively on the stock market.

“Every transaction in the market attracts VAT, and you know very well that dividend attracts 10 per cent VAT,  so you can see the enormity of its effect. This will be on the negative side because investors will have to pay.”

Corroborating the above, Managing Director of Highcap Securities David Adonri says: “Since stockbroker already charges five percent, further increase in VAT will increase cost of transactions in the capital market. This VAT is added to the cost of the transaction, which is paid by the investor.

“If the VAT is increased, it means that investors will pay more. The aggregate cost of transaction in the Nigerian capital market is already one of the highest in the world.

“This is a disincentive to investing in the market. We shall continue to advocate for discontinuation of VAT in the market because it is erroneous to tax investment.”

Fowler’s  thought

But FIRS Executive Chairman Babatunde Fowler thinks differently. Contrary to fears that VAT increase may cause hardship for the poor, he says VAT is charged on consumption and capacity to consume.

The FIRS boss explains that  VAT as a consumption tax, is primarily designed to support poor people, and not to create hardship for them.

“When you don’t consume certain categories of goods and services, you are not liable to pay VAT charges on those items.

“VAT is not charged on all medical and pharmaceutical products. It is not charged on basic food items.

“It is not charged on books and educational materials. It is not charged on baby products, fertilisers, locally produced agricultural and veterinary medicine.

“VAT is not charged on farming machinery and farming transportation equipment.

“VAT is not charged on all exports, plant machinery and goods imported for use in Export Processing Zones and free trade zone: Provided that 100 percent production of such company is for export.

Experts react

Commenting on the issue, Head of Tax and Corporate Advisory Services at PwC Nigeria Taiwo Oyedele says, “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.”

Other consequences

Beyond the revenue impact, there will be other unintended consequences such as higher inflation, interest rate hike, more unemployment and people will generally become poorer. 

In addition, without a VAT registration threshold and zero rating of basic consumption it will increase the burden on the poor and SMEs contrary to the 2017 National Tax Policy. Moreover, seeking to expand the VAT net while also increasing VAT rate at the same time is a conflicting strategy.  

For Nigeria’s first capital market professor, Uche Uwaleke, the idea of increasing the VAT to fund the new minimum wage will end up being counterproductive. 

Uwaleke posits that 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.

“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.” 

Tinubu cautions

Also lending a voice of caution, national  leader of the All Progressives Congress, Asiwaju Bola Tinubu, tells the federal government to jettison any plan to increase VAT for now.

He spoke at the colloquium held in commemoration of his 67th birthday in Abuja Thursday, saying such action could lead to hardship among Nigerians.

“I must say this to Prof Osinbajo and his team, don’t increase VAT but increase tax net to accommodate those who are not yet paying. Don’t reduce the people’s purchasing power. ”

With experts’ advice, the nation’s tax authority should have a rethink in order not to jeopardise the people’s standard of living. 

But in all of this, the Presidency is yet to comment on the issue, thus making the pronouncement neither here nor there.

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