The Federal Government, Organised Private Sector (OPS) members and Labour have agreed on the need for a diversification strategy to halt the economy’s high dependence on oil. However, achieving this via fiscal diversification, which involves increasing the tax revenue, such as the proposed upward review of the Value Added Tax (VAT), has never gone down well with the OPS and Labour. Their grouse is that the nation’s weak manufacturing base has rendered the economy unproductive and can’t support VAT or any tax increase. Assistant Editor CHIKODI OKEREOCHA examines the fears of the private sector and their push for increasing the tax net, instead
It’s a fiscal policy whose time has come. Though still in the works, the Federal Government’s proposed upward review of the Value Added Tax (VAT), from five to 7.5 per cent, came at a time the payment of more taxes has become imperative to mitigate the country’s fiscal challenges and generate enough cash to finance her capital and recurrent expenditures.
Indeed, this has been the case, particularly, since the economic downturn triggered by the crippling impacts of revenue drop caused by crashing oil prices in the international market.The sharp revenue drop from the Federation Account has since forced a strategic rethink in favour of fiscal diversification, which involves increasing tax revenues, including an upward review of the VAT.
Besides, Nigeria’s VAT rate, according to experts, is not only among the lowest in the world, but also well below VAT rates in other countries of the Economic Community of West African States (ECOWAS). The International Monetary Fund (IMF) Managing Director, Ms. Christine Lagarde, who drew attention to this in 2016, therefore, advocated a boost of the country’s revenue base by increasing the VAT on goods and services.
Lagarde’s counsel may have hit the right chord with the country’s economic managers and tax authorities. For instance, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, said the proposed VAT increase to 7.5 per cent is low compared to other countries. In fact, he said with this increase, Nigeria still has the lowest VAT rate in the world.
Emefiele, who spoke to reporters after the Monetary Policy Committee (MPC) meeting held in Abuja, said: “If the government can meet its obligation through this increment, it should be supported.”
He appealed to Nigerians to show understanding and support the government’s policies, as it had the responsibility to fend for its citizens by providing basic infrastructure like roads, electricity and hospitals, among others.
However, the Federal Government’s latest push to bring Nigeria’s VAT rate at par with its peers has been met with stiff resistance by members of the Organised Private Sector (OPS), the Labour movement and, indeed, some Nigerians critical of the administration’s fiscal reforms.
The OPS, including Manufacturers Association of Nigeria (MAN), Nigeria Employers’ Consultative Association (NECA), Lagos Chamber of Commerce and Industry (LCCI), National Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) and even the Nigerian Labour Congress (NLC), among others, have continued to kick their heels, insisting that the move would not be in the interest of the economy and Nigerians.
At the core of the agitation by the OPS is the weak or fragile manufacturing base, which, according to them, has continued to render the economy unproductive and can’t support increasing the VAT or any form of tax.
Labour, on its part, fears that if and when implemented, an increased VAT will erode the gains of the new N30,000 National Minimum Wage. The payment of the new wage earlier approved by the National Assembly has begun, according to Minister of Labour and Productivity Chris Ngige. But, Labour fears that a VAT increase will hurt workers, particularly the low income ones.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, explained that the proposed VAT increase followed the recommendation of the Presidential Technical Advisory Committee. She said the increase would possibly take effect in 2020 after consultations with states and local government areas, other stakeholders and the approval of the National Assembly and amendment of the VAT Act.
But there are indications that the consultations ahead of the take off of a new VAT rate may not enjoy a smooth sail. For instance, even before the consultations begin, MAN had described the timing of the proposed VAT increase as inappropriate. It added that it would also spur spontaneous increase in inflation rate occasioned by increased prices of goods and services.
MAN said although it appreciates the need for the government to generate more revenue to fund its developmental initiatives amid declining revenue from oil, increasing VAT at this time was inappropriate, especially when the minimum wage of N30,000 was just agreed upon.
MAN Director-General Segun Ajayi-Kadir put the association’s grouse in perspective when he said the increase could send a wrong signal that the government is not sensitive to the plight of the low- and middle-income earners, who are clearly in the majority. He said it is a typical case of government taking back what was given with the right hand through the National Minimum Wage with the left hand through the increase in VAT.
More importantly, perhaps, the implications of the economy’s fragility for the proposed VAT increase are not lost on MAN, with Ajayi-Kadir noting, for instance, that the economy just recently exited a debilitating recession, with a fragile growth rate of less than two per cent recorded last year, which should be delicately managed.
He pointed out that Nigeria’s precarious macro-economic condition requires palliatives that would improve investment and not higher tax burden. “The prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91 per cent growth rate amid 2.6 per cent population growth rate that are already cumulatively limiting competitiveness could be further worsened,” he warned.
The MAN DG said, undoubtedly, the burden of the VAT increase, when implemented, would be shifted to consumers who ware struggling, and the economy will certainly experience demand crunch, while inventory of unsold items would soar. The profitability of manufacturing concerns will also be negatively impacted, while many factories will witness serious downturn or wind down operations.
“This will also worsen the already high unemployment position of the country, which is above 23 per cent, as Nigerians employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country,” Ajayi-Kadir warned.
The MAN DG recommended that rather than increase the VAT rate, government should widen the tax net to meet the growing need for more revenue to address the development objective of the country.
“There is also the need to harmonise taxes/levies/fees payable by businesses in the country to attract more investment that would translate to higher productivity and more tax revenue for the government in the medium and long term,” he also counselled.
NECA also threw its weight behind the need to increase the tax net instead jerking up VAT, which, according to it, would definitely lead to an increase in the cost of doing business, and would likely be passed to the consumers whose purchasing power, is already weak.
Its Director-General, Mr. Timothy Olawale, recommended that the government should widen the tax net to generate more revenue and ensure effective collection of taxes from non-compliant citizens or defaulters.
He said more individual and corporate entities should be captured in the tax net paying VAT, adding that if the government must increase VAT against the will of the people, “It should be limited to luxury or ostentatious goods only.”
The NECA DG also faulted the comparison of VAT rates with other countries, describing it as irrelevant. According to him, business operating conditions in those climes are more clement than what obtains in Nigeria.
Ajayi-Kadir aligns with him, noting that an ideal tax policy should be such that takes into cognizance the status of the economy. His words: “An ideal VAT policy for Nigeria should take into account the current profiles of Nigeria’s Per Capita Income (PCI), National Minimum Wage (NMW); and Global Competitiveness.
“PCI and NMW will help highlight what will be the implication of upward review of VAT on the already depleted wellbeing of majority of Nigerians, while global competitiveness will present insight on the impact of such review on the real sector, particularly the manufacturing sector.”
Although the MAN chief admitted that “There is no doubt that VAT is an important revenue source to the government,” he, however, said “The principle of a good tax system is predicated on payment convenience, otherwise it could boomerang, leading to crowding out of businesses; more misery to the citizens and even lesser revenue to the government.”
The LCCI also said the new increase in VAT would put more pressure on businesses and could also affect consumer purchasing power. Its President, Mr. Babatunde Ruwase, who spoke during the weekend, at the fifth Presidential Policy Dialogue, organised by the LCCI, said Nigerians had been paying so much money without getting value.
“There are so many levies, but no accountability of such levies. That is why the average Nigerian does not believe he should pay more. If we can see result, see what the government is doing with the money, Nigerians would be ready to pay. But the situation is that there is mistrust by Nigerians. We are not ready to pay more because the one we paid we can’t see what it was used for,” Ruwase said.
Indeed, past attempts by the authorities to turn to tax sources to broaden the nation’s revenue base were often met with stiff resistance by not a few Nigerians.
Many of them cite entrenched corruption in Nigeria’s tax administration, which makes it difficult for successive governments at various levels to make judicious use of tax revenue to improve on social and physical infrastructure. As a result, many of them shun payment of taxes.
The Nation learnt that the underlying factor responsible for the groundswell of opposition against the proposed VAT increase is that the economy is unproductive. The thinking is that raising VAT to cushion the crippling effects of the revenue shortfall caused by sliding oil prices would not work because the masses are already impoverished by the economy’s unproductiveness.
The harsh environment caused by the nation’s huge infrastructure gap, particularly electricity supply, has also not helped matters. The situation has rendered the real sector, including manufacturing and agriculture, unproductive and uncompetitive.
Apart from economic reasons, which, according to experts, pose serious hurdles to the use of tax revenue to revamp the economy, alleged corruption in the tax administration system remains a sore point.
The truth is that most Nigerians are unwilling to pay tax unless they are compelled. And they hinge their refusal on the belief that government’s officials will embezzle any money they pay.
The thinking, and rightly so, is that Nigeria’s tax system allows for compromises, which tax officials have exploited to defraud the government of its revenue. This is why despite the fact that tax is the most reliable source of revenue for government all over the world, the rate of tax evasion in Nigeria is very high.
While such public perception of the nation’s tax system may take time to change, experts say that it is important to work on the economy’s unproductiveness, which is believed to be largely responsible for the nation’s narrow tax base.