As part of a policy initiative it adopted in January 2019, the Federal Executive Council [FEC] recently approvedaplan to increase Value Added Tax [VAT] in Nigeria from the present 5% to 7.5%, a 50% increase.Minister of Finance, Budget and National Planning Zainab Ahmedannounced this at a public consultative forum featuring civil society groups and designated agencies on the draft 2020-2022 Medium Term Expenditure Framework [MTEF].
The minister said theproposed VAT increase falls under the Strategic Revenue Growth Initiative [SGRI]which is aimed at boosting government revenue, along with other options such as sale of government property and non-oil assets, proceeds from privatization and multi-lateral and bilateral tied loans. However, the increase will come into effect only when backed by legislation to be passed by the National Assembly. SRGI policy was articulated by a special Presidential Technical Committee comprising both public officers and private sector operators with Bismarck Rewane, Chief Executive Officer of Financial Derivatives,as chairman.
According to Mrs. Ahmed, government’s attraction toa VAT increase comes from the extra revenue it would provide it, given the huge burden it is facing in servicing domestic and foreign debts as well as other statutory obligations. VAT has accounted for an annual average revenue of N900 billion in the past six years.With the expected rise, it may provide N1.35 trillion per annum collectible revenue. Government also justified the increase on the grounds that even with the planned rise, Nigeria’s VAT rate is still below the African average.
Granted that government needs more money in the face of many challenges, increasing VAT rate is a troublesome option. The movehas attracted opposition from several quarters including the National Association of Chambers of Commerce, Industry, Mines and Agriculture [NACCIMA], Manufacturers Association of Nigeria [MAN], Nigeria Employers Consultative Assembly [NECA] and Lagos Chamber of Commerce, LCC. These representatives of the country’s private sector have with one voice called for a review of the plan which,if implemented wouldaffect the Nigerian economy adversely by crippling the real sector.
VAT is a consumption tax which is levied at every point of sale starting from the raw material stage, and going to the final point of retail of the product. Ultimately the consumer pays the whole tax as the producers routinely pass same up to the consumer at the final point of purchase. The concern of the private sector business community is that an inordinately high rate of VAT may limit aggregate demand for products and dampen consumption.The hard-pressed Nigerian economy hardly needs that now.
Beyond diminishing aggregate demand,a VAT hike has the potential of increasing inflation, as the inherent tax burden is passed onto consumers who have topurchase goods and services at higher prices with the very poor exchange value of the Naira. Meanwhile, the income level has remained static without the government implementing the new minimum wage provision several months after its enactment into law.
Everything considered, the National Assembly, which has the last word in this matter, should demonstrate considerable caution before legislating a VAT hike. The desire of the government to generate more revenue should not lead to the imposition of strangulating measures on the Nigerian citizenry. And in the case of VAT, an increase at this time is patently ill-advised and should be avoided. There are many areas within the purview of government business where it can boost revenue. Plugging existing loopholes and wastages in fiscal administration across its agencies, will earn for it much more revenue than whatever it hopes to earn from increasing VAT.
Besides, the government seems to have downplayed the expansion of the tax net through the inclusion of the country’s informal sector.Several studies have shown that this option will offer even more revenue potential than the present receivables from VAT and other taxes.