VAT increment: Robbing Peter to pay Paul?

Since its inauguration in 2015, the administration of President Muhammadu Buhari has categorically proposed economic diversification as the way of ending Nigeria’s monolithic oil dependent economy. Though, the key focus then was on agricultural transformation, government has been looking for all means possible to increase its source of revenue.

In an attempt to fulfill it’s promised ‘change agenda’, Buhari’s administration devised all means possible to source more money to be able to deliver its promises. Part of those measures was collection of heavy foreign loans. Though agriculture has not been doing so bad, it however failed to provide the outstanding alternative of revenue generation to support the monolithic oil-dependent economy that generates almost 90% of the country’s income.

For a government that has increasingly financed its fiscal deficit from borrowings, there is no doubt that it needs more innovative approaches to scaling up its revenue capacities to meet its growing funding commitments. It is against this background that on September 11, the Federal Executive Council agreed to an increase in Value Added Tax, VAT from 5% to 7.5%.

Addressing journalists after the FEC meeting in which the proposal was approved, Nigeria’s minister of finance, budget and national planning, Haj. Zainab Ahmed said the government proposed raising VAT to 7.5 up from the current 5%, noting that the current level is one of the lowest in the world.

Zainab explained that the increase becomes necessary even though federal government only retains 15% of the tax, leaving 85% to states and local governments. She these two tiers of government therefore need the increase to meet the obligations of the new minimum wage.

Although, even prior to the minimum wage, federal government argued that many of the 36 states struggle to pay the workers’ salaries.

VAT in Nigeria is a tax payable on goods and services consumed by individuals and business organisation. VAT is charged on most goods and services provided in Nigeria and also on goods imported into Nigeria except for medical and pharmaceutical products, basic food items, educational materials, commercial vehicles, agricultural equipment and other related goods and services.

As Africa’s biggest oil exporter seeks to reduce its reliance on crude sales, president Buhari’s government has repeatedly said that it want to boost non-oil revenue, since oil sales make up 90% of foreign exchange receipt.

The decision of the federal government to undertake this increment was not unexpected as there had been murmurings in government circles on the need for an increase as a veritable way of meeting the expansive fiscal expenditure needs of the federal government that have ballooned over the last five years.

Consequently, the Central Bank of Nigeria, the apex bank in the country says the increase, upon implementation has the potential to increase fiscal revenue to support expenditure and reduce the budget deficit as well as government borrowing.

In an interview with Reuters recently, the CBN governor, Godwin Emefiele emphasized that even with what he called ‘the little increase’, the increase may still not cover gap in the government finances. He said government has no any option, and that if the citizens say it should not borrow, then it should increase revenue.

Emefiele added that ”if government must raise revenue, and we think that this should be the only way through which the government can raise revenue to meet its obligations, I think it calls to a rationale that what we are saying is that it is the right decision to say that government has to increase VAT from 5% to 7.5%”.

“Nigeria’s VAT rate even at 7.5% might still,be one of the lowest in the world. I appeal therefore to Nigerians to please understand “, the CBN governor added.

However, since the declaration of the increase, series of reaction from different Nigerians continue to occupy Nigerian media space. In a release by the People’s Democratic Party, PDP (the biggest opposition party in the country), an increase in VAT will only worsen what it called the country’s ‘decrepit economy’ and put more pressure on families and businesses, thereby resulting in increase in prices of goods and services.

Economists believe that while an increase in VAT in an ordinary case would have been beneficial to Nigeria in the medium to long term. The current reason being proffered for this VAT increase is wrong and will lead to increased corruption and mismanagement, particularly at the state level since most of the money is not earmarked for capital projects or education.

Furthermore, it has been observed that the proposed increase will likely buoy and bolster the purchasing power of Nigerians by increasing the minimum wage, which on paper this government claims is the major reason for this increase to enable states pay for the increment, at best, the utilisation of funds at the state level is heavily mismanaged and the states stand to gain the most from this increase, because they already collect 50 % of all VAT collection proceeds.

Also, because VAT is basically imposed on consumption, it is pertinent to understand that the diminished scale of consumption in the Nigerian economy may affect the collection performance of VAT. From a simple economic point of view, any increase in VAT would disproportionately affect poor people. But even beyond that argument, the biggest challenge is that any increase in indirect taxes affects the price of goods and services. This in turn would affect the country’s inflation rate. With an inflation rate of over 11 per cent, the outcome of the proposed VAT increase is very critical.

To this note therefore, it is justifiable to conclude that the plan by the federal government to finance the increment in the wage burden through tax increment would force companies to raise prices significantly, ultimately placing the incidence of the tax increment on the consumers. According to them, in effect, it could be seen as a fiscal policy designed to ‘rob Peter to pay Paul’. We also expect the increase in minimum wage to be eroded by price increases of key household items, offsetting the expected improvement in purchasing power. The proposed tax policies will also pose a downside for foreign investments in the Nigerian industrial climate as well as growth of SMEs. We believe companies who are unable to raise prices might lay off workers in a bid to manage costs, further impacting on the level of unemployment.

The reality is that any increase in VAT will be counterproductive to the goals of reducing poverty and inequality, given the existing high economic disparity in the county where there is already a high cost associated with the poor accessing economic opportunities. But then again, VAT will inevitably affect everybody that spends money, both rich and poor.

It’s obvious that Nigeria’s inflation rate has remained in double figures for the last three years as against the CBN’s single-digit target, thereby resulting in increase in the cost of living in the country where most people live in less than one dollar per day. Yes, the Feder Inland Revenue Service (FIRS) were able to generate over N5.2 trillion in 2018 and are targeting N8.9 trillion this year, but, should that be at the detriment of the struggling Nigerians? What then is wrong the this administration’s change agenda of reducing poverty? Time alone shall tell.

Sani Ibrahim Paki writes from Kano saniibrahimpaki@ gmail.com