It has become a recurring threat that each time any Nigerian needs money it will either be talks about “removal of fuel subsidy” or hint at reviewing Value Added Tax, VAT percentage up. Since the talk about how to fund the 2019 budget gained traction especially with the added responsibility of higher minimum wage, talks about finding the balance of the shortfall have gained traction. Recently, some senior officials of the Federal Government hinted at government’s intention to increase VAT by 50 per cent as part of adjustments aimed at funding the 2019 budget.
First was Budget and National Planning Minister, Udo Udoma who said the raise, first announced by the chairman of the Federal Inland Revenue Service, Babatunde Fowler, will engineer the required funds to meet the new wage obligation being approved by the National Assembly. Udoma and Fowler were amongst senior government officials who appeared before the Senate Committee on Finance.
On his part, Fowler said that the proposed payable VAT, based on the increment, will 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.
In Fowler’s opinion, Nigerians who travel to West African countries know that theirs is much higher. He added that the officials of state pay when they go for those trips. The increase is also part of efforts to create funds for the minimum wage. In essence, the proposed increment is justified since it appears that Nigeria currently have one of the lowest regimes of VAT rates in the world.
Expectedly, the Manufacturers Association of Nigeria, MAN has urged the government not to increase VAT rate. The umbrella body in the real sector insisted that the proposed increment did not take into consideration the difficult times in the country’s economy and further argued that it will be tantamount to taking back what was given with the right hand through the National Minimum Wage with the left hand, through increase in VAT.
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 Local Governments, net of four per cent cost of collection to FIRS.
If the rate is increased by 50 per cent, all things being equal, the country will generate on average an additional N450 billion annually. Less four 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. Pitiably, 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 is bound to reduce the proposed revenue.
For us, contemplating an increase in VAT now is wrong on many fronts. Yes timing is an issue. This period is very fragile, therefore any change in policy is inconsistent with current economic reality. Experts have said VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer.
Also, it will further depress stocks’ prices and increase transactions 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 increment would 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 stocks and the larger economy.
Government should rather focus on making twice as much from VAT at current rate by reforming the law, expanding the net and ensuring a robust administration rather than by increasing rate. What’s important is making more money without upsetting the balance in the economy. When the economy is buoyant we can talk about increments with some sectors not a blanket one.
