When the Value Added Tax (VAT) recently increased to 7.2 percent is implemented, it is expected to generate not less than N2 trillion into the government coffers in 2020. And going by the increasing revenue already recorded and the government’s plan to expand the VAT net, as well as expected improved remittances from corporate entities and government agencies with poor records, the target would be achieved.
The amount represents about 21 percent of the N9.7 trillion of the 2020 budget proposal that would be sent to the National Assembly. While the three tiers of government may get additional revenue from the VAT pool, despite eliciting mixed reactions, the poor masses would surely be at the receiving end, particularly its effects on purchasing power, through possible inflationary pressure in the market.
The Nigerian Bureau of Statistics (NBS) put the VAT pool in 2018 at N1.1 trillion, while the Federal Inland Revenue Service has already generated more than N600 billion in the first half of 2019. Going by the NBS 2018 figures, the recent increase in VAT from five percent to 7.2 percent (2.2 percent addition), representing a 44 percent increase, is expected to generate additional N484 billion yearly. And by the current sharing formula, the Federal Government would get N73 billion; states, N242 billion; and councils, N170 billion.
The Partner/Head of Tax and Corporate Advisory Services at PwC, Taiwo Oyedele, said that while the increase of 2.2 percent might appear small, “it is, in fact, a 44 percent increase in VAT cost to many businesses and consumers.”He said the negative impact would include an increase in prices of products, leading to higher inflation and less disposable income for already poor households. “The situation will result in lower consumption and a decline in the growth rate.”
Oyedele expressed fear that because input-VAT on capital expenditure is not allowed as a credit in Nigeria, the cost of real investments would go up and more people would evade the tax as compliant entities become less competitive.“A fundamental principle of taxation is that people should pay according to their abilities. The question is: can everyone afford a 7.2 percent VAT rate? The answer is no. But are there people who should pay 7.2 percent or more? The answer is yes.
“To limit the impact of the increase, the government should exempt or zero rate essential consumptions like foods, education and primary healthcare, and create a VAT registration threshold to eliminate VAT compliance burden for small businesses with annual turnover of less than equivalents of N13million, like in Ghana, N17 million in Kenya and up to N23 million in South Africa. The government should make the VAT refund system work so that any business in a refund position is paid promptly, as Rwanda pays VAT refund within 30 days.
“The government should lead by example and ensure that all ministries, departments, and agencies fully comply by remitting VAT collected from their contractors. There is the need to ensure transparent reporting and efficient utilization of the revenue for public services and infrastructure to act as palliatives and catalyst for growth,” Oyedele advised.
The Lead Director of the Centre for Social Justice (CSJ), Eze Onyekpere, described the VAT increase as a welcome development. He said that Nigeria’s tax-to-GDP ratio was one of the lowest in the world, while the rate was one of the lowest in the sub-region. He, however, warned that the additional revenue to be realized from the increase might not be substantial if the tax authorities did not take concerted steps to increase the number of natural and artificial persons who will pay the tax.
“The way forward is to ensure that all persons liable to VAT, collect and remit the same to the appropriate authorities. While we take note of the arguments about the harsh economic conditions and how the increase would impose hardship on the poor, we note that all Nigerians ought to make sacrifices, considering Nigeria’s parlous fiscal condition.
“These hard times call for increased fiscal transparency and accountability on the part of the government, which manages public resources. But governments all over the world are known to revel in opacity. It is, therefore, our duty as citizens, as we pay this increased VAT, to demand utmost accountability and transparency from our leaders. We cannot afford to go to sleep as we have done over the years and expect things to improve,” he said.
But the Nigeria Employers’ Consultative Association (NECA) called for caution in the timing of the implementation. The Director-General of NECA, Timothy Olawale, said the benefits of the approved National Minimum Wage of N30,000 had been hugely impacted negatively by the proposal, as it would reduce the purchasing power of the citizens through the rise in prices of goods and services. To the Afrinvest Securities Limited, the move is still not the solution, as the tax increase is primarily to support the finances of states in the takeoff of the new minimum wage.
The Managing Director of the company, Ayodeji Ebo, told The Guardian at the weekend that the timeline for the implementation of the new rate was unclear, noting that the planned wide consultations and amendment to the existing VAT Act would take longer than expected before implementation.
“While the states would receive a significant boost, the increase is unlikely to make a dent on the Federal Government’s fiscal deficit, which we estimate at N3.4 trillion in 2019. We believe the Federal Government requires a significant revenue boost, which would come from elsewhere. Our analysis shows that removing petrol subsidies and adopting a market reflective exchange rate of N360 per dollar for the computation of oil receipts would increase its revenue by N880 billion.
“While we align with the age-long call to boost non-oil revenue, we believe that the government has chosen an easy but less impactful route with the proposed increase in VAT.“The increase should be part of a comprehensive fiscal reform package that would seek to boost collection efficiency, rein in recurrent spending, remove subsidies and widen the tax net.”