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More Funds For FG, States As 7.5% VAT Takes Effect

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The new 7.5 per cent Value Added Tax (VAT) came into effect yesterday as President Muhammadu Buhari signed the 2020 Finance Bill into law

Buhari’s signing of the Act at the State House, Abuja, empowers the federal government to collect the sales tax, which proceeds are shared by the three tiers of government.

The implication of this, is that instead of the hitherto five per cent, Nigerians will henceforth pay 7.5 per cent as VAT, with the governments having more funds in their kitty.

To set the stage for the president’s assent to the Finance Bill, the National Assembly had passed it and forwarded the legislation to him for assent.

Buhari’s assent to the bill was contained in a statement issued yesterday by his special adviser on media, Femi Adesina,

While presenting the 2020 Appropriation Bill to the National Assembly, the president sent along the Finance Bill where he explained that “this Finance Bill has five strategic objectives, in terms of achieving incremental, but necessary changes to our fiscal laws.

“These objectives are promoting fiscal equity by mitigating instances of regressive taxation; reforming domestic tax laws to align with global best practices; introducing tax incentives for investments in infrastructure and capital markets; supporting micro, small and medium-size businesses in line with the Ease of Doing Business Reforms, and raising revenues for government.

“The draft Finance Bill proposes an increase of the VAT rate from five per cent to 7.5 per cent, as such, the 2020 Appropriation Bill is based on this new VAT rate,” he added.

 

Analysts, Market Operators Laud PMB On Finance Bill

Meanwhile, analysts and other stakeholders in the economy have hailed the president for assenting to the bill and urged the government to fulfil its part of the social contract to the people.

Head of Research at United Capital, Wale Olusi, said that the development, which came early in the first month of the year, meant that everyone is very serious about the revenue drive.

To him, it is a commendable effort which started from the leadership of the National Assembly and President Buhari.

He said: “This means that VAT becomes 7.5 per cent. It means each of the country’s tax laws is going to be effectively reviewed based on the highlights of the Finance Bill with immediate effect.

“That means more taxes in the purse of the government. The state governments going forward will become more viable because more than 60 per cent of VAT go to them. As far as we know, many of the states have been struggling to pay salaries but with this increment in VAT some of them will now be able to get a little bit of more naira to fund their budget,” he said.

Olusi said that it also meant that as a country, Nigeria would move slightly closer to being able to fund the minimum wage that was increased recently, adding that state governments would now have to choose which level or where they want to be in terms of the increase, because the federal government had already taken a stand and have started paying its workers the minimum wage.

“It is positive for the economy; it means the government can budget better. On the part of the citizens what we would want to see now is the government fulfilling its side of the social contract because when I pay my tax, I expect that the government will fix the roads, provide power and potable water among others. If I am paying more taxes, I want to also feel the impact of all these welfare services.

Also, head of Tax and Corporate Advisory Services at PwC Nigeria, Taiwo Oyedele, commended the president for signing the bill.

He said that this was the first time since the military era that the government was having a budget and a finance bill that addressed how it would fund the budget.

According to him, the Micro and Small and Medium Enterprises (MSMEs) are the biggest winners as the bill is tilted towards encouraging the sector.  The bill made provisions for companies with an annual turnover of less than N25 million to be exempted from paying company income tax.

Also, the federal government raised the threshold from which stamp duty will be charged for online transactions from the current N1,000 to N10,000.

In his comment, the president of the Manufacturers’ Association of Nigeria (MAN), Engr. Mansur Ahmed commended President Buhari for signing the Finance Bill into law.

Ahmed said that it would impact on the way of doing business as the government and private sector would be able plan appropriately, as he recalled that “in the past, we have budgets not approved on time disrupting planning by both the government and private sectors.”

He added that “it is a good thing we are trying to restore sanity in this order as this helps to inject discipline and allow businesses and government to plan properly.

The MAN boss urged urgent implementation of the budget and the finance law, saying that since the budget had been approved, the release of funds should not be delayed.

Ahmed said: “It is in the capital projects that many MSMEs depend on for their operations. What we hope is that this will help the MSMEs to grow their operations.”

On the Ease of Doing Business, Ahmed stated that last year, Nigeria made progress. “We moved 15th places up. We hoped this will be sustained and improved upon particularly in the area of infrastructure delivery, policy delivery, fiscal and economy regulation. All of these affect the ease of doing business and the more effective they are the better for the economy,” he said.

Ahmed added that the finance law would create an enabling business environment and alleviate the tax burden for small and medium enterprises, as this was expected to encourage growth and investment by that sector of the economy.

Also, the director-general of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said that the finance law has a number of favourable provisions for small businesses, stressing that this is an aspect to commend.

Yusuf, however, noted that the VAT increase would impact adversely on businesses from cost-pressure perspective.

According to him, margins would be affected, depending on the extent to which additional costs could be passed to consumers. “The worry is that we are operating in a high cost environment,” Ahmed stated.

The LCCI’s DG said that the operators have to worry about the provision on minimum tax. “We had argued against this provision. It is inappropriate to compel loss making firms to pay tax, no matter how little. This amounts to erosion of capital.”

He, however, remarked that the impact on government revenue would be positive, especially for states and local governments, which fiscal position would be enhanced. “States and local governments are the major beneficiaries of VAT,” he said.

A tax consultant, Dr. Obasi said that the new tax hike would increase cost of tax collection, discourage compliance, lead to fraudulent activities in the tax system and negatively impact on the economy.

Obasi told LEADERSHIP that the motive behind the action would be defeated by the common use of technology. He stated that everybody would begin to under-declare turnover that is less than N25 million. “It is easy to manipulate the system with ICT,” he said, adding that they (government) are shooting themselves on the leg.

He said the fact that withholding tax is usually taken from every government contract, for instance, makes it clumsy for implementation.

Obasi wondered if the government would refund the taxes withdrawn from a company which tax did not amount to N25 million.

He argued that the government is not supposed to increase taxes now but to expand the tax base and warned that “compliance will be difficult now.”

The tax consultant who noted that it had been difficult for the government to ensure compliance in tax collection with the previous five per cent rate, said that the increase in taxes is because the “federal government wants the world to know that it is doing something. What’s more important is compliance. Even with the CIT, they will lose out because it’s a target they cannot meet.”

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