Early this year on this page, we canvassed an opinion with the above caption. With the recent increase of the Value Added Tax (VAT) from five per cent to 7.2 per cent, our argument then, as at now, remains the same. The decision is ill-advised. For one reason, it will wipe out whatever benefits derivable from the newly approved but yet to be implemented minimum wage of N30, 000. We hereby reproduce that editorial.
Last week, two senior officials of the federal government dropped the hint of government’s intention to increase Value Added Tax by 50 per cent as part of adjustments aimed funding the 2019 budget.
Budget and National Planning minister, Udo Udoma, said the raise, first announced by the chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, will create the required funds to meet the new wage obligation being approved by the National Assembly. Messrs Udoma and Fowler were amongst senior government officials who appeared before the Senate Committee on Finance headed by John Enoh.
According to Fowler, the proposed payable VAT based on the increment would be between 6.75 per cent and 7.25 per cent as against the five per cent on all products in the country. This implies an increase of between 35 per cent and 50 per cent. He added that the increment will affect the Company Income Tax and the Petroleum Profit Tax.
Fowler said such increment is due because a lot of Nigerians travel to Ghana and other West African countries and they can see that theirs is much higher. He added that they pay when they go for those trips and that Nigerians should be ready for an increase in VAT. Corroborating what Fowler said, Udoma explained that the increment is necessary in order to create funds for the minimum wage.
Various reactions have trailed the statement made by the government’s representatives. The Manufacturers Association of Nigeria (MAN) cautioned the federal government against increasing Value Added Tax (VAT). The Director-General of the association, Segun Ajayi-Kadir, said the proposed VAT increment did not take into cognisance the difficult times in the country’s economy. He said it will be seen as a typical case of government simply taking back what was given with the right hand through the National Minimum Wage with the left hand.
The average VAT collection in the past six years is about N900 billion. The revenue is shared 15 per cent to the Federal Government, 50 per cent to States and 35 per cent to LGs net of four per cent cost of collection to FIRS.
If the rate is increased by 50 per cent (all things being equal), the government will generate an average of an additional N450 billion annually. Less 4four 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 will inevitably impact on consumption and VAT compliance. The combined effect will reduce the expected revenue.
Contemplating an increase in VAT now may be wrong on timing and inconsistent with current economic realities. Experts have said VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer.
The experts also believe that beyond the revenue impact, there will be other unintended consequences including but not limited to higher inflation, interest rate hike, more unemployment and poverty.
These would have adverse effect on some critical sectors of the economy. For instance, it will further depress stocks’ prices and increase transaction cost in the Nigerian Stock market. For now, every purchase or sale of shares by stockbrokers to investors attracts five per cent VAT as commission on the Nigerian Stock Exchange (NSE). There are fears that further increase will cause more apathy on the already depressed market and reduce investors’ patronage. When investors’ patronage on the market is reduced, then there will be a free fall in the share prices of companies which of course will impact negatively on the stock market. Since stockbrokers already charge five percent, further increase in VAT may be a disincentive to investing in the market.
If we go ahead with an upward review of VAT, companies, especially those producing items with elastic demand, would experience reduced sales as they may not be able to easily transfer it to their customers. This will lead to inventory accumulation, low capacity utilisation, lower profits and downsizing of workers thereby complicating the unemployment challenge in the country.
We believe the country can make twice as much from VAT at current rate by reforming the law, expanding the tax net and ensuring a robust administration rather than by increasing the rate.
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