The increment of Value Added Tax from five per cent to 7.2 per cent have continued to elicit mixed reactions from tax operators and the public. BUKOLA IDOWU looks at the issues raised.
The government of President Muhammadu Buhari last week assented to the 44 per cent increase in Value Added Tax (VAT) bringing it to 7.2 per cent from the five per cent which it had been since 1993 when it was introduced.
Provided for by the Value Added Tax Decree 102 of 1993 which became effective in 1994, VAT requires manufacturers, wholesalers, importers and suppliers of VATable goods and services to be registered within six months of commencement of business.
VAT in Nigeria is a consumption tax levied at every stage of production and ultimately borne by the final consumer of a good or service. VAT is charged on most goods and services provided in Nigeria as well as goods imported into Nigeria.
The VAT Act 1993 provides for a recoverability system whereby VAT, which is paid during the course of production, is recovered by the taxpayer in form of input VAT and ultimately passed down to the final consumer.
Last year the Federal Government had made N1.1 trillion form VAT representing 21 per cent of the N5.3 trillion that the Federal Inland Revenue Service (FIRS) generated in the 2018 fiscal year with plans to further increase the volume of revenue generated through VAT to N3 trillion by the end of 2019 which would be an increase of over 200 per cent from the 2018 collections.
The federal government in the second quarter of the year had generated N311.94 billion from VAT, an improvement over N289.04 billion and N269.75 billion that was realised in the first quarter of the year and the corresponding quarter of 2018 respectively.
Compared to other climes in Africa and the world, Nigeria has one of the lowest VAT which is a variant of sales tax in the world. Asides Eritrea, which also has a five per cent rate, Nigeria is the only other country in Africa with a single digit VAT of five per cent, a rate it had maintained since it was introduced in 1993.
Globally the highest sales tax rate is held by Bhutan which has 50 per cent sales tax while back home in Africa, Madagascar and Morocco hold the highest rate at 20 per cent followed by Cameroon which has a 19.25 per cent sales tax.
While Niger holds a 19 per cent rate, Benin, Burkina Faso, Chad Ivory Coast, Rwanda, Congo, Mali all have a sales tax rate of 18 per cent. Kenya and Zambia hold 16 e cent while Ethiopia, Gambia, South Africa, Zimbabwe all hold 15 per cent rates. Egypt holds 14 per cent while Ghana and Botswana have 12 per cent sales tax. Somalia and Angola alongside Djibouti and Comoros all have 10 per cent sales tax rate.
Rising from the Federal Executive Council on Wednesday, Minister of Finance, Budget and National Planning, Zainab Ahmed, said the increment in VAT is to ensure an increase in tax revenue.
“This is important because the federal government only retains 15 per cent of the VAT, 85 per cent is actually for the states and local government and the state need additional revenue to be able to meet the obligations of the minimum wage.
“This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT Act. So, it is not going to be implemented immediately until the Act is reviewed.”
Announcing the increment via his twitter account, Special Assistant to the President of the Federal Republic of Nigeria on Digital and New Media, Mr. Tolu Ogunlesi, noted that the process of increasing the VAT rate will involve extensive consultations with State Governments and Local Government Authorities, and relevant stakeholders in the private and public sectors of Nigeria.
The process will ultimately result in amendment of the VAT Act, Cap. V1, Laws of the Federation 2004 following which the new VAT rate will take effect in 2020.
Commenting on the increased VAT rate of 7.2 per cent, Wole Obayomi of KPMG noted that the proposed increase in VAT rate has been on the fiscal agenda of the Federal Government for some time now.
“One of the arguments of the Government in support of the increase is that Nigeria’s five per cent VAT rate is the lowest in Africa. However, the argument does not acknowledge the difference between the VAT regime in the other countries and Nigeria, where the VAT regime is a variant of sales tax.”
It will be recalled that the Government once increased the VAT rate to 10 per cent in 2007 but had to revert to the status quo following opposition by the organized labour. Obayomi noted further that the current approach of engaging with relevant stakeholders before seeking amendment of the VAT Act to implement the proposed increase in the VAT rate is, therefore, a commendable initiative.
“Stakeholders are encouraged to use the opportunity of the proposed consultation to express their views on the Government proposal. The Government should also use the opportunity for a wider VAT reform in Nigeria beyond merely increasing the VAT rate.”
On her part, President of the Chartered Institute of Taxation of Nigeria (CITN) Dame Olajumoke Simplice, the increment in VAT has long been overdue. Noting that the rate is one of the lowest in the world and the lowest in Africa. Simplice said she had expected a 50 per cent increase to 7.5 per cent as a way to further boost tax revenue of the government through indirect tax.
“At the institute we have always advocated for a movement from direct taxes to indirect taxes. For indirect taxes like VAT you don’t feel as if you are paying, and it is the easiest form of tax to be collected. In fact it is supposed to be contributing a bigger percentage to government revenue than it is currently.
“Over the years we have been trying to say increase but I think now that the oil revenue has left us we are now back to the thinking arena where we can now put on our thinking cap and look at the issue of taxation in this country” she noted.
Simplice said that with the free trade agreement which the country recently signed with other African countries, there is need for it to raise its VAT. “We have had the five per cent since 1993 and it is the lowest not only in the West Africa region but the lowest in Africa and the world. We cannot continue like that if we want to play in the big league and the international economy landscape.”
Faculty Member of the Lagos Business School, Dr Adi Bongo noted that there is need for government to ensure the translation of tax revenue to a better life for the citizenry. Bongo who noted that the increment in VAT is coming late, said successive governments in nigeria have not been able to properly utilize the revenue from taxation.
According to him, the issue with Nigeria is not the tax revenue but the utilization of the funds generated, as he lamented that over the past two decades, over $16 billion have been sunk into the power sector without any concrete results been seen.
However for Dr Suleyman Ndanusa, former Director-General, the Securities and Exchange Commission (SEC), the timing was wrong as he said the proposed VAT would affect demand for goods and services.
Stating that the VAT increment was wrong considering the challenges in the economy, he said “The timing is quite wrong, at this point in time our economy needs to be helped by policies that would ginger more consumption and more disposable income for masses and the people.”
This was also the view of Director General of the Nigeria Employers’ Consultative Association (NECA) Timothy Olawale,who noted that the benefits of the recently signed National Minimum Wage of N30,000 would be neutralised by the proposed increase in the VAT.
According to him, the increment would further reduce the purchasing power of the citizens, lead to increase in prices of goods and services, increase inflation rate, and further contraction of the economy, as he said since the purchasing power of the citizens would have been reduced, sales of goods and services would reduce and inventories for business would be high.
“This can lead to closure of businesses that ought to be supported by government in reducing unemployment rate that is currently alarming. The government should bring up machinery in order to further increase the tax bracket, widen the tax net as the country is presently achieving less than 10 per cent of its VAT potentials.”
Analysts at Anderson Tax however, noted that the current VAT system in Nigeria disallows input VAT claims on capital goods and services. The effect of this, they said is that the VAT paid by such manufacturers and service providers would be incurred as a business cost since they cannot be recovered.
“This makes the Nigerian manufacturing and related sectors uncompetitive when compared to some other foreign jurisdictions. For example, the United Kingdom (UK) VAT system provides for the recovery of input VAT rate in Nigeria in cases of supply of services.
“Thus, an increase in VAT rate in Nigeria may be counter-productive to companies that cannot recover input VAT already paid. This is because the increased input VAT that is not recovered would result in an increase in the cost of doing business and a reduction in the profitability of such companies.
“While the progressive increase in revenue generation is commendable, there are still several factors hindering the FIRS from optimizing the revenue that could be generated from VAT collection in Nigeria. The issue of tax evasion raises a major concern, as a number of taxpayers that should ordinarily remit VAT are not captured within the tax net. In addition to this, the lack of sufficient database and information poses a huge challenge to proper taxation of the informal sector.
“Also, there still exists some inefficiencies and leakages which hamper the amount of revenue that could be realized from tax sources even though several measures are being put in place to plug the leakages. Thus, an increase in VAT rate may not be very effective in improving revenue, if the foregoing concerns are not addressed. This is because an increased rate may not generate the projected amount of revenue in the face of a likely increased level of non-compliance that could result from an increased tax burden and other factors impeding effective tax collection and administration.”
Meanwhile a consensus amongst all stakeholders is the need to ensure that the revenue collected is used for the development of the country through provision of the needed infrastructure.
Ndanusa while noting that the government should not just increase VAT just to increase its revenue base said “The paradigm for me has to change, are we increasing tax just for purpose of revenue or managing our fiscal policy taxation for growth? The paradigm has shifted from revenue driven taxation to growth driven taxation.”
The CITN President, Simplice stressed the need for government to ensure the utilization of the funds received from tax noting that when Nigerians see the development brought by tax they will be more willing to pay. “Let us ensure that the tax money is working for the stakeholders, the taxpayers. Let us see improvements in infrastructure especially power, roads, education good health. When all these are put in place, you will see that Nigerians are good people and good citizens. We only need good leadership, we need to see that government means well for us, we will pay our taxes.”
She however advocated for a decrease in PAYE from the highest of 24 per cent to maybe 18-17 per cent so that the highest base would be maybe 18 or 17 and for company income tax to be reduced to about 20 per cent, saying it “releases income to employees and they would spend that excess income and when they spend the excess income it creates a demand for goods and if company income tax is also reduced it releases 10 per cent to manufacturers who would in turn increase their output and when they increase their output the tendency is there for them to employ more and their employees will pay tax. And it is like a circle because people will spend.”
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