Prof Teju Somorin is the first female professor of Taxation in Nigeria and immediate past President of Chartered Institute of Taxation of Nigeria (CITN). The tax expert who currently sits atop as Head of Department, Taxation Department, Caleb University, in this interview with Ibrahim Apekhade Yusuf, speaks on the nation’s tax ecosystem and other related issues. Excerpts:
What is your assessment of Nigeria’s VAT architecture; do you think it can help to raise the revenue base to an appreciable level?
My straight response is that the VAT has raised the revenue profile of Nigeria tax revenue since its commencement in 1994 and it is still a reliable source of non-oil revenue, even up till now. The VAT has helped many developed countries raise the percentage of their indirect tax contribution to gross tax receipts. It has also enabled many developing countries strengthen their collection to achieve greater fiscal adequacy. Naiyeju (1996) reported that in Bolivia, tax revenue accounted for only 1% of GDP prior to the introduction of VAT in 1986. The figure jumped to 7% in 1990, the success of which made the government raise the VAT rate from 10% to 13% in 1992.
Naiyeju further reported that according to Carlos Silvani and Alberto Radano, the tax ratio rose from 11% to 14% following the introduction of VAT in Uruguay in 1968; by 1989, the revenue from VAT had topped the list of tax revenues in Uruguay at 6.6% of GDP. With respect to Nigeria, the VAT has been instant success since commencement. The VAT yielded a total revenue of N8.6bn in 1994 against the projected figure of N6b. As a result of what opinion leaders termed ‘expert implementation’, in 1995, N21bn was realised by the Federal Inland Revenue Service (FIRS) against the revenue estimate of N12bn and since then, the performance has been very impressive. In 2002, against a projection of N90bn, the actual collection was N103b. Somorin(2012). The revenue yield in 2002 constituted about 25% of total FIRS revenue in that year.
In recent years, the VAT collection from both domestic VAT (non-imports) and imports VAT which is being collected by the Nigeria Customs Service (NCS) on behalf of the FIRS is still impressive. Particularly, over the last three years, the non-imports VAT rose from N597.4124 billion in 2015 to N650.3439 billion in 2016 by about 9% and a further rise in 2017 by about 19% to N770.3479 billion. Also, the NCS-Imports VAT rose from N169.9211 billion in 2015 to N177.8552 billion in 2016 by 5% and a further rise in 2017 by 12% to N202.0005 billion.
During the FIRS stakeholders’ Retreat in Lagos recently, Fowler, the executive chairman, informed that with respect to the VAT, in 2018, N1 trillion mark was “crossed.” He said the VAT has been on the growth and is basically the fastest tax type in the world. “In 2016, we collected N828 billion, 2017 it was N972 billion and in 2018 it was N1.1 trillion.” With enthusiasm, he acclaimed that the 2018 collection of N5.320 trillion was the highest revenue ever generated by the FIRS as the highest in FIRS history. The closest was the N5.07 trillion generated in 2012. As a former staff of FIRS, I support this assertion. I will like to draw your attention to the fact that the achievement of the 2017 and the 2018 budgets have been driven largely by the VAT collection by FIRS.
From my book, TEJUTAX Reference Book Nigerian Tax System, let me re-state these positive remarks made about the VAT in its early years:
According to the then Head of State, Gen. Sani Abacha, in his 1995 federal budget statement, “VAT has proved a remarkable success.”
Manuwa Kuewumi, Editor, Nigerian Tax News, said, “The dramatic increase of non-imports VAT from 50% to 71% of gross VAT yield early 1995 attests to the effectiveness of tax effort by the administrators.”
Just as a report published in Safara Magazine (London), Oct-Dec., 1995 issue, reported that “Something historic is happening in Nigeria. It is the positive, social and financial impact of the Value Added Tax (VAT). The success recorded by the tax has not only vindicated the administrators, they (tax administrators) deserve commendations.”
Dr. Bolaji Bati asserted that “it is because the tax administrators have chosen to effectively market VAT that the policy has recorded a historic success in Nigeria.”
Prof. S. A. Aluko, then Chairman, National Economic Intelligence Committee, July, 1996, also said this about VAT: “The value-added tax is not an easy tax to understand, much so to implement. If not deftly introduced and implemented, it can cause economic, social and political upheavals. The fact that the Nigerian VAT had been widely accepted, smoothly and, thus far, successfully implemented, is a credit to its designers, the government and its executive authorities.”
In the words of Chief D. A. Olorunleke, former Director-General Federal Ministry of Finance, “VAT has shown an initial success here in Nigeria. The credit for this success must go to FIRS and the government for the initial arrangement made to establish an enabling environment coupled with proper education, needed for its successful take-off. In terms of revenue yield, VAT has turned to be a revenue spinner so far. Its contribution to the federation account and to the accounts of the states is fast surpassing income tax revenue. Even the revenue authorities are already showing signs of contentment over VAT and neglect for income tax.”
In many African nations, consumption tax is the biggest source of revenue, with value-added tax accounting for over 90 percent of tax revenue. But the reverse is the case with Nigeria, where VAT contributes just 1% to the GDP. What can be done to address this?
Yes, I agree with you that a consumption tax such as the VAT is a big source of revenue in many African countries. But you need to know that it is not only in Africa. It is a global phenomenon. According to Reid (2016), “175 of the world’s 200 countries where a value-added tax (VAT) is imposed, VAT accounts for 20% of all government revenues worldwide.”
However, I disagree with you that VAT contributes just 1% to the GDP. What is the source of your assertion? Did you carry out any research on which the findings revealed that the VAT contributes 1% to the GDP?
Studies have been carried out on the impact of the VAT on the economic growth in Nigeria. We have to examine some empirical findings which revealed that the VAT has positive effect on the economic growth. Olatunji (2009) did a study on the effectiveness of the administration of VAT to improve tax revenue and boost economic growth in Nigeria, the study showed a positive correlation between the VAT and the GDP. Similarly, Izedonmi and Okunbor (2014) empirically examined the contribution of VAT to the development of the Nigerian economy. Their findings showed that the VAT revenue accounted for 92% significant variations in Nigeria’s GDP and it revealed a positive but insignificant correlation between VAT revenue and GDP.
Similarly, Oraka, Azubike O, Okegbe, and Raymond (2017) examined the extent to which value added tax has affected the Nigerian economy for the period 2003 to 2015. Their findings show that the value added tax has not significantly affected the Gross Domestic Product of the Nigeria economy. It was also discovered that VAT has a negative relationship with per capital income. They also found out that VAT has a positive relationship with total revenue generation of the federal government. The implication of their findings according to them is that the Nigerian economy will experience slow development in spite that VAT has a positive effect on revenue generation. Based on the findings, they recommended that the government should put in place fiscal policies that will enhance investment in agriculture, industries and technology in order to stimulate overall productivity growth.
But to address your concern, a lot is being done to increase the percentage. Strategies have been put in place by the FIRS and the Joint Tax Board (JTB) to improve the revenue yield. Such strategies which include collaboration between the 38 tax authorities should be strengthened and sustained. Administrative framework for whistle blowing which is one of the strategies for curbing tax evasion and widening the tax net should continue to be supported to promote tax revenue growth in Nigeria. VAIDS, a veritable weapon for increasing the low tax to GDP ratio was introduced in 2017. Most developed nations particularly those within the OECD1 have tax to GDP ratios of between 32% and 35%. The Ministry of Finance noted that Nigeria needed to increase her tax to GDP ratio. This is one of the reasons why the Voluntary Assets and Income Declaration Scheme (VAIDS) was introduced in Nigeria to address the shortfall. The primary purpose of the scheme is to expand Nigeria’s tax base and therefore improve the low tax to Gross Domestic Product [GDP] ratio currently about 6% to15% by 2020.
Moreover, the objective of the 2012 National Tax Policy, revised in 2017, was to address structural, institutional and other inherent problems associated with the Nigerian tax system.
With these points, you will agree with me that a lot has been done to address your worry.
ORAKA, AZUBIKE O.
OKEGBE, T. O.
EZEJIOFOR RAYMOND
Do you think the nation VAT Act should be reviewed?
Let me give you a background to amendments to the VAT Act in Nigeria. In my paper delivered in 2015, where I outlined all the amendments to the original Value Added Tax (VAT) Decree 102 of 1993 since its enactment in 1993 up to 2017, it found out that there are over forty amendments to the VAT Act. The first six amendments which took place during the military era were contained in the Finance Miscellaneous Taxation Provisions Decrees. In 2014, the Value Added Tax (Exemption of Commissions on Stock Market Transactions) Order, 2014 released via a gazette dated 30 July 2014 made some amendments. In 2016, the Joint Tax Board proposed to introduce VAT on international passports as part of measures to expand the tax net.
Given this background, yes, I agree the Act should continue to be reviewed and indeed it is being reviewed. The current review to the VAT Act started as far back as 2009 when I was still in the FIRS and one of my functions as the Coordinating Director in charge of Compliance and Enforcement Group, was to oversee the Legal Department and the Tax Policy Departments who were charged with review of tax laws. As at then, there was a draft bill for the VAT Act. In recent times, a lot has been done to amend the VAT law.
For instance, the VAT Amendment Bill 2015 seeks a significant upward review of all the fines and penalties in the Value Added Tax Act CAP VI, LFN 2004.
The VAT Act is one of the Acts being reviewed through the Value Added Tax Act (Modification) Order.
The overall aim of the new Executive Orders and amendment bills is to improve the ease of doing business in Nigeria by simplifying tax payment which will increase government revenue and ultimately grow the economy. The modifications intended in the provisions of the Value Added Tax Act (Modification) Order suggests that, residential property rentals, transport services for use by general public and life insurance premiums are now exempt from the VAT. The changes have been communicated via a circular of the Ministry of Finance, which I think became effective on 4 June 2018. We are still expecting the Bill to be enacted by the National Assembly.
In December 2016, the federal government raised duties on luxury goods and beverages imported into the country under the Economic Community of West Africa’s (ECOWAS) Common External Tariff (CET) regime. The increase was 10 to 70% the value of imported yachts, luxury automobiles such as SUVs, boats, and alcoholic beverages. But curiously, there are fresh plans to raise the VAT for beverages like Coke, Pepsi, amongst others, as suggested by the Finance Minister last Tuesday. Is this the right thing to do at this point in time?
There is no best time to take a policy decision and implement it. If government believes this is the right time, so let it be. But some measures must be put in place.
It is not unusual for countries to come up with strategies to promote economic growth. With respect to Nigeria, the federal government unveiled its Strategic Revenue Growth Initiative (SRGI) for sustainable revenue generation in various sectors of the economy, part of which is to increase the rate of Value Added Tax (VAT) from the current 5%. It is believed that this initiative as it has been said repeatedly would significantly boost the federal government revenue outlook in the years ahead.
The immediate past Minister of Finance, Mrs. Kemi Adeosun, and the current Minister of Finance, Mrs. Zainab Ahmed, believe strongly in this initiative
There should be a research on this to guide us in taking the right step. While I support an increase in the rate of the VAT, it is my opinion that the increase should be on selected luxuries items. In effect, I am advocating two rates of tax, the standard five percent rate and a higher rate of 7.5% on few selected items consumed by the rich. The increase in rate should not be across all goods and services.
Increase in rate of the VAT has been carried out by many countries. In a study carried out by a team which I chaired in 2018, it was found out that 29 of the 30 countries in the Organisation for Economic Co-operation and Development (OECD) have implemented the VAT while the United States remains the lone exception. In the years since they began their VAT, 20 of the 29 have increased their rate by at least one percentage point. Denmark leads the group with a 10 percentage point increase from 15 percent to 25 percent. On average, the 20 countries have raised their VAT rates by 4.5 percentage points.
It has been suggested that the administration of VAT should be decentralised to boost collection. Do you subscribe to this?
What will be the merits of fiscal decentralization? Will it promote economic growth? Is there a positive and significant relationship between fiscal decentralisation and economic growth? Nguygen and Anwar, (2011) observed that fiscal decentralisation does not have economic impact because of the benefits derived from economies of scale in the provision and delivery of public goods. Furthermore Davoodi and Zou (1998) concluded that fiscal decentralisation is negatively correlated to economic activity in developing countries but has no significance in developed countries. Whether fiscal decentralisation of the VAT is fundamentally suitable for Nigeria should be subjected to empirical analysis.
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