Anxiety over 7.2% VAT increase

Posted by News Express | 22 September 2019 | 1,521 times

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The planned increase of the Value Added Tax rate from the current 5 per cent to 7.2 per cent is already generating rumpus in different quarters with concerned stakeholders expressing fears that the new policy regime on VAT would further impoverish Nigerians, report Ibrahim Apekhade Yusuf, Charles Okonji and Medinat Kanabe in this piece culled from today's edition of The Nation

To say that the proposed new 7.2 per cent Value Added Tax rate for the country, up from the current 5 per cent is already a hotly debated issue, is simply stating the obvious. Truth is, fears are being expressed by a lot of people who hold the view and very strongly too that the new policy regime, to all intent and purpose, was not well thought out.

The new policy regime on VAT

It may be recalled that the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had last Wednesday after the Federal Executive Council (FEC) meeting in Abuja, said, “We are proposing and council has agreed to increase in the VAT rate from five per cent to 7.2 per cent. 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 governments. The states need additional revenue to be able to meet the obligations of the minimum wage.”

According to the minister, although there is no effective date when the new rate will take off as stakeholders, including the National Assembly and the states, would have to agree on the date, she, however, said that could be sometime in 2020 after the VAT Act has been amended by the National Assembly even as she hinted that about N2.09tn will be accruing to the Federation Account and the VAT respectively.

A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.

Countries with VAT

From available information, as of 2018, 166 of the 193 countries with full UN membership employ a VAT, including all OECD (Organisation for Economic Cooperation and Development is an intergovernmental economic organisation with 36 member countries, founded in 1961 to stimulate economic progress and world trade) members except the United States, which uses a sales tax system instead.

The acceptability of VAT worldwide

In a study titled, ‘How VAT took over the tax world’ and commissioned by Ernst & Young Global Limited, under EY Tax Insights, recently, the report observed that VAT is continuing to evolve and expand as new systems roll out and existing ones adapt to digital disruption and other forces.

In the six decades since the VAT first made its debut in France, this broad-based consumption tax has spread rapidly across the globe, the study stated.

Besides, it said, “Governments are fond of VAT and its cousin, the goods and services tax (GST), for many reasons. The levies are considered one of the least harmful taxes for economic growth and can raise large amounts of revenue because they apply to a significant proportion of economic activity.

“One of the biggest issues we had was businesses that did not prepare early enough in terms of systems testing and training.”

Today, VAT and GST continue to expand and evolve as new systems roll out and existing ones adapt to the implications of digital disruption and other forces. This transformation has consequences for businesses, which must adequately prepare for new VAT and GST rules and procedures, and update their technology to comply with new e-filing requirements.

Countries planning to introduce a new VAT or GST system should keep in mind that a well-planned transition is important. The introduction of such a tax requires adequate administrative capacity, training and technology on the part of both businesses and the government.

Groundswell of support for proposed VAT

According to Olajide Abiola, a public affairs commentator, “the VAT increase does not adversely affect the common man as some have falsely peddled. Like it has been stated, it is a consumption tax and the greater benefit goes to the states. It is now left to us to either vote the right governors or hold them as accountable as we do the federal.”

Discordant tunes over new VAT rate

One individual who has spoken dispassionately about the importance of the VAT template as a veritable tool for socioeconomic development is Omooba Olumuyiwa Sosanya, renowned accountant.

Speaking with our correspondent at the weekend on the merits and demerits of the proposed new VAT rate, Omooba Sosanya, who is the founding father of the Association of National Accountants of Nigeria (ANAN), the second widely acclaimed national accounting body in the country, said, the new policy regime, is simply a knee jerk approach to issues of national development.

In his own view, the federal government is simply shooting itself on the foot if it thinks that the N2.2 trillion being projected as VAT receipts in the proposed new rate would solve the myriads of problems bedeviling the country’s economy.

According to the technocrat, he would rather the government follow a new paradigm shift in its quest for revenue drive through VAT.

Specifically, he said, “The problem of taxation in Nigeria, VAT in particular is not a question of rate but has to do with the poor and inefficient tax administration. For instance, Canada, Saudi Arabia, and many other countries still charge 5 per cent VAT rate and they are doing well in terms of generating adequate revenue.

“In Nigeria, it is not a matter of rate. Tax administration in Nigeria is ineffective and inefficient and the administration is over whelming the Federal Inland Revenue Service (FIRS). What we need to generate more revenue through taxes, including VAT, is to bring more taxable persons who would be paying tax. The whole idea of allowing the FIRS alone to be collecting the VAT is counterproductive. We need to decentralise VAT collection, where by all the states would be able to administer the VAT so you can bring in more people into the tax net including the informant sector.”

He reiterated that if the VAT collection is decentralised, the country stands the chance to generate about N1trillion through VAT on a monthly basis and N12trillion annually as against the projected N2.2 trillion yearly based on the new rate.

Echoing similar sentiments, Dr. Olukunle Iyanda, an accountant, said, there is nothing wrong with increasing taxes, what is wrong is if the increase pushes people further into poverty.

Besides, Dr. Iyanda said, another fundamentally wrong thing is if there is no corresponding strategy to boost the economy, increase income and alleviate people’s pain.

“Yes the government announced that VAT will increase from 5% to 7.2% however where this will only compound the situation of the citizen, it will push more people into poverty, don’t forget that the minimum wage is still actively N18000 ($50) a month even at this most state government are unable to pay, the minimum wage is increased to NGN30,000 ($84) a month yet government has not being able to implement it therefore if the VAT rate is raised without the corresponding increase in the living wage, government has only further eroded the purchasing power of the people.”

While noting the fact that government needs to generate revenue to run the economy and taxes is the most effective way of generating further income for the government, Iyanda, who is strategy and innovation consultant and CEO at BROOT Consulting Nigeria Limited, “We need to move from the current tax-paying population of 6% to double-digit, this will, however, happen if there is a strong sense of transparency, accountability and judicious use of the revenue so corrected.”

Currently, he says, the system is opaque and shrouded with corruption. Raising some posers, he queried, “How confident are we as a citizen to point to how our taxes are being used? Tax should not be used for the flamboyant lifestyle of public officials. The option that is open to the government before a further increase in tax rate is to drastically reduce extravagance and irresponsibility in governance and come up with an effective tax system where more people are made to fulfil the civic duty.”

Government, he stressed, need to rejig the economy and bring more people out of poverty, there has to be a drastic strategy to grow the economy and empower the people of Nigeria. Conversely, the former university don, said, the endemic poverty if left unchecked will make it impossible to lift people out of poverty neither will it allow the government to use the taxpayers’ money judiciously.

Unintended consequences of the new policy regime

The view in some quarters is that the new policy regime if implemented will have far-reaching socioeconomic implication on different sectors, including housing, manufacturing, services, employment, amongst other sectors.

In the opinion of Afam Mallinson Ukatu, a manufacturer, “There has been a long battle between tax authorities and manufacturers in the country over multiple taxation of our businesses and if the issue of multiple taxation is not urgently addressed by government, more manufacturing companies are likely to exit the economy.”

Ukatu, while noting that the lamentations about all sorts of taxes are not yet addressed, now the government has come up with increase in VAT. The implication of this is that manufacturers would further be impoverished while most SME’s would be forced out of business because it cannot compete favourably with the imported goods that find their way into the nation’s market.

Expatiating, Ukatu, who is the Executive Chairman and Founder of Mallinson & Partners Limited, said government should look into multiple taxations and VAT. “I have always argued that taxes should be paid on your turnover, but what of a situation where a manufacturer is losing money. It is obvious that a manufacturer produces and still losses money and you are still expected to pay your tax.”

According to him, “There should be a system whereby you are evaluated by the tax authorities just like China, USA and other countries. There is what they keep as special rebate for manufacturing companies, because this is what encourages people to go into manufacturing. Without manufacturing, there wouldn’t be any way to for high rate of unemployment to reduce. Government can only provide about 10 percent of the total job requirement of the population, manufacturing can generate over 60–70 percent of the needed employment.”

Comparing tax regimes in other climes

Also raising his voice over the din, Dr. John Isemede, an expert in export and international markets, said, countries like Nigeria, Malaysia, United Kingdom, South Africa, Saudi Arabia, Canada and others have the lowest VAT in the world which is just 5% tax. “Unlike other countries, the situation in Nigeria is sad because it is not properly collected. The contribution of all taxes to GDP in Nigeria is just 6%.”

Going down memory lane, Isemede, former Director-General, Nigerian Association of Chambers of Commerce, Industries, Mines and Agriculture (NACCIMA), who recalled that VAT was introduced in Nigeria 25 years ago, however, regretted that it has not had much of an impact.

“What is 5% compared with our neighboring countries, where VAT in Benin Republic is 20%, even if I am carrying a truck from here to Ghana, I will pay all different taxes. Benin Republic is 20%, Ghana started with 12%, and now 17.2%, and if you look at it, you said we just recovered back from recession; the economy is still very difficult.”

Expatiating, Isemede said, “The question we should ask ourselves is what is the value of 5% VAT to the national budget? If we now have to increase it from 7.2% to 7.5%, which is only 0.2 or 0.3, what can that shift do to Nigerian budget or economy rather?”

While noting that the new VAT rate is not the solution to the nation’s problem as it would place more burdens on Nigerians, including small businesses, Isemede advised that there must be protective taxes so as not to wipe out the entire SMEs.

While Nigerians await the effective date of implementation of the new VAT, indications are that during the public hearing to be held at the National Assembly where critical stakeholders would ventilate their views on the matter, the idea could be totally jettison as it was done in the recent past.

Source: News Express

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