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New VAT jolts small businesses

DG SMEDAN, Dr. Dikko Radda
DG SMEDAN, Dr. Dikko Radda

A section of the Nigerian economy which will feel the impact of the recent increase in Value Added Tax from 5% to 7.5% is Micro Small and Medium Enterprises (MSMEs).

President Muhammadu Buhari recently signed the Finance Bill which among other things, increased  Value-Added Tax (VAT) from 5% to 7.5%.

“We introduced the bill alongside the 2020 budget to reform Nigeria’s tax laws to align with global best practices, support MSMEs in line with our Ease of Doing Business Reforms, incentivize investments in infrastructure and capital markets and raise government revenues,” the president tweeted.

Small and Medium Enterprises (MSMEs) operators have expressed mixed reactions on this. Many of them say contrary to government’s thoughts, increment in VAT will would increase the cost of doing business and force many of them out of business.

The head of Lagos-based Shoespeed Interglobal Services Limited, Abiodun Folawiyo, said in Italy where SMEs have electricity, good roads, access to funding and more, people do not mind when government charges exorbitant taxes because entrepreneurs  know what government will do with it.

“But in Nigeria, the money they collect from us, you hear that someone stole N30 billion. So, the tax they collect is not being translated into good use to provide infrastructure. There is no effort by government to fix infrastructure in the country that will translate into reducing the cost of doing business,” he said.

Folawiyo says government should give SMEs tax holiday instead.

“I think government should give SMEs tax holiday. They should declare tax holiday for us and not tax increment. The rate of migration is so high. Government should make business more attractive for us and foreign investors,” he said.

An Abuja-based business woman, Mrs. Ekaette Umoh, said government has no basis for increasing tax when it has not improved infrastructure to create the enabling environment for SMEs.

“Many of us spend much on infrastructure. So, what is the basis for increasing VAT? What infrastructure has been improved before increasing tax?  All the previous VAT that has been collected, what has been done with it?

“We have to manage the road to my former office by ourselves, electricity is elliptic. The government has not fixed the road to make it more accessible or improved on electricity so I don’t have to use generator for 12 hours a day.

“So, if you providing basic infrastructure, I don’t mind but government is not doing that.  This VAT increment shows lack of creativity by our government,” she said.

Umoh said this policy would not in any way drive investment. “Investment is what Nigeria desperately needs with the massive unemployment level we have,” she added.

The CEO of Dolphin Restaurant and Catering Services, Chef Nneka Agbo, said consumers would feel more impact of the new tax.

“Basically, the increment will directly be transferred to customers such that it will impact on their perceived earnings and savings. However the downturn for registered businesses such as ours will be that customers will now prefer to patronise substandard and unregistered eateries, food joints and restaurants for their daily meals. Sales may be affected and the purpose for which the VAT was increased may not be achieved and revenue from this source might dwindle,” She said.

A Senior Economist with SPM Professionals,   Mr Paul Alaje, said many SMEs would close as a result of the increment.

“Most SMEs have disposable incomes, which means the cost of living will be higher. Many SMEs will go down the drain because they cannot compete in this environment.  With 7.2% VAT, there is no consideration for SMEs and it might become very difficult for them to thrive. Some of them will have to close-shop,” Alaje said.

“I am worried because I think government should have considered the SMEs. Though the argument of government is that in other countries, more VAT is charged.  But what government has not mentioned is that the living standard in such environments is better than what we have in Nigeria and support for small businesses is more in those countries than we have in Nigeria.

“The worry here is that government may have to reconsider especially as it affects small businesses, so we don’t have more death of small business.” Alaje added.

A lecturer in the Business Management Department, Ahmedu Bello University (ABU) Zaria, Dr. Mustapha Shitu, said while an increased VAT regime would improve government revenue and help it meet some fiscal needs, small businesses would certainly bear the brunt.

“The increase from 5% to 7.5% is a welcome development on the one hand, because it is an additional income to be used to reduce the deficit and fund critical programmes such as security, health and education,” he said.

According to him, the increase in VAT  will have a negative impact on SMEs.

“It is going to be costly for them to do business because they have to calculate the VAT on every product at every step of the process,  increase in the amount of accounting a business needs to perform.”

Dr. Shitu also queried government’s integrity to judiciously use the funds generated with increased VAT.

“Looking at all the issues and benefits, the question one would ask is, how judiciously has the government utilised the 5% VAT that was collected all these years to suddenly want to increase to 7.5%? We still have poor schools, hospitals, etc. Also, how efficient will the collection of the new VAT be, how can it be ensured it goes into government coffers, and how can government ensure that big businesses and corporations actually pay?” he asked.

An SME Consultant and DG  Global Centre for Human Development and Entrepreneurship Development (GLOCHEED), Mrs. Rose D. Gyar, said government should not always rush to impose tax but instead, block leakages.

“I don’t think the tax system should always think of imposition of programmes to increase IGR, they should rather engage with stakeholders, especially operators generating businesses for taxation to reason together on how to block the leakages for a more effective tax regime as well as blockages that hinder the utilization of public resources for effective service delivery to citizens. This will positively impact on tax collection rather than impositions that would possibly lead to closure of businesses to increase unemployment.” Gyar said.

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