How not to tax a desperate country

It is undeniable that Nigeria is in the middle of a revenue crunch, the likes of which she needs to find concrete answers to, and fast. The current government, fresh from its electoral victory, has committed to expanding its revenue generating capacity ostensibly to fund the country’s many pressing priorities. One of its proposed policies involves raising the Value Added Tax (VAT) rate from 5 percent to 7.5 percent.

This proposed increase has met with unsurprisingly withering criticism from Nigerians both locally and in the diaspora. While a few economic analysts have come out in defence of the VAT hike, saying that is a progressive tax which will target the luxury consuming rich and middle classes while sparing the poor, this view, some point out, fails to understand the fundamental structure of a VAT, considering that all the proposals provide no exemption to items most purchased by the “poor.” In view of this muddled state of affairs, some critics have offered to remedy the problem. Enter in, Senator Ali Ndume.

The Borno senator’s grand proposal is to freeze VAT at its current level, while spearheading a new bill that will provide for a Communications Service Tax (CST). In his thinking, a VAT hike imposed on all 200 million Nigerians is unjust, unconscionable and indefensible in these pressing economic times where the real income of the average Nigerian has shrunk over the last three years.

Most economists in fact agree that sweeping tax hikes disproportionately affect lower income earners as they are compelled to pay a higher percentage of their income into the public purse. Hence, such taxes are termed regressive. The Senator is on the right side of economics with this limb of his argument.

Which makes the senator’s justification for the CST equal parts interesting and confusing. The senator believes the CST will only affect the rich minority and if any, only a small proportion of the poor majority.

In making the case for the new tax in a recent Channels TV appearance, he opined that there are only about 60 million “real” mobile subscribers considering the well-known fact that most subscribers maintain more than one phone connection. As context, NCC data suggests that there are 173 million active mobile lines in Nigeria as at June 2019. Thus, Ndume argues, these 60 million Nigerians are a more ideal subset of the population to be taxed as against all Nigerians who will be affected by the VAT umbrella.

The senator’s logic is problematic for a number of reasons. First, he insists that all mobile users in Nigeria are well-to-do and anyone who can afford to have a phone can ab initio bear a greater tax burden. This logic is easily quashed by the market women, water truck pushers and motorcycle drivers who can be seen brandishing mobile devices all across this land. Furthermore, the Senator argued that mobile phone use is to use his words, “discretionary.”

In an age where the use of telecommunication services is as necessary as food, as ubiquitous as commuting and is the largest non-oil contributor to Nigeria’s GDP, this claim is disingenuous. Just to give one fact, one of the country’s four mobile phone operators supports half a million direct and indirect jobs all by itself. Thirdly, the CST suffers from the same fundamental defect suffered by the VAT – it is a direct tax which will surely be passed on to the consumer. The protestations of Senator Ndume to the contrary cannot alter that incontrovertible fact. Lower-income Nigerians will feel the CST in much the same way as the VAT hike.

What is perhaps the most interesting aspect of the proposed CST is the top rate, which is pegged at 9 percent. By contrast, the VAT increment would have shot it up to 7.2 percent. The senator’s sole explanation for this completely arbitrary figure is that our closet Anglophone neighbour, Ghana, recently increased its CST from 6 percent to 9 percent. What the Senator conveniently ignored is the history.

Ghana first implemented a 6 percent CST tax rate in 2008 and took a decade to consider an increase. Ghana also does not have nearly as many multiple taxes on telecommunication as Nigeria - where operators labour under 39 different taxes, charges and levies across federal, state and local jurisdictions. Finally, Ghana’s CST is sector-specific, remitted for the express purpose of improving telecoms infrastructure and other ancillary services. In Nigeria, the proposed CST will be remitted to the centrally managed Consolidated Revenue Fund, just like customs levied and motor vehicle license payments.

While communication services are getting cheaper across the world, the last thing Nigerian policymakers should be doing is encumbering already squeezed consumers by placing a consumer tax an essential service which will be paid by end users. Widening the tax base to incorporate new taxpayers, incentivising people to come out of the informal economy and reducing the cost and size of governance are some sensible initiatives to pursue in this regard. Telecoms services are an essential, if not the essential aspect of navigating an increasingly fast-paced and dynamic world.

A new tax on keeping Nigerians connected to each other and the rest of the globe sector represents a play from a long-discredited playbook.