Proposed VAT Increase And The Endangered Middle Class

By Ikechukwu Onyewuchi   |   06 September 2015   |   12:03 am  

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• Experts Kick, Say Focus Should Be on Tax Coverage, Not Rate

To the average Nigerian, taxation is as contentious as it is annoying. Businesses, big and small, have many tales to tell. With the cries of multiple taxations by corporations and entrepreneurs, to intense battles at curbing tax evasion and avoidance by tax collectors, the stories of tax worries abound at both ends of the divide.

But it appears that the worries by the consumer in the country may increase in coming days with the announcement by the Federal Inland Revenue Service (FIRS) of plans to double the Value-Added Tax (VAT) rate from 5 to 10 per cent to help shore up government revenue eroded by declining price of oil.

However, experts argue that the emphasis shouldn’t be on the rate of VAT, but its coverage, noting that the government would only be over-burdening an emerging middle class that ought to be nurtured.

VAT was introduced in Nigeria in September 1993, following the recommendation of a committee set up two years earlier to review the country’s tax system. But the actual implementation kicked off in January 1994 after the promulgation of the VAT Decree No. 102 1993. It replaced the Sales Tax and covers nine category of products including sales and services in registered hotels, motels and similar establishments. A consumption tax, it provides for high yield in revenue collection with the minimum resistance from taxpayers.

The new government, headed by President Muhammadu Buhari, riding on the on principles of accountability and transparency, has been on a rampage to collect all revenue due it, including maximising taxation. But, for many years, Nigerians have refused to see the wisdom in paying for governance when the country is blessed with plethora of natural resources, which had, over time, accounted for low tax rates. And it seems, from the hushed arguments in street corners and social media, the people are waiting for the right moment to begin to wail.

“The plan is to increase to VAT 10 per cent this year, but we have to consult first with relevant stakeholders,” former acting executive chairman of the FIRS, Sunday Ogungbesan, said recently.

Nigeria depends on crude exports for about 70 per cent of government revenue and more than 90 per cent of foreign exchange. But the price of oil in the international market has been on a free-fall since last year, and may frustrate Buhari’s efforts to deliver on his election promises. And it seems VAT might come to the rescue.

Painting the dire state of government revenue, Ogungbesan said that the FIRS would put more effort in meeting targets after its collection of N1.97 trillion in revenue in the first half of the year fell short of a goal of N2.29 trillion.

“If we achieve our revenue targets, to a great extent, government deficit would be reduced. Our plan is to bring every business into the tax net; this economy can survive outside oil,” Odugbesan said.

According to a Tax Partner with PwC, Taiwo Oyedele, citing the VAT law, basic food items are not liable to VAT, which serves as a relief to Nigerians, 100 million of who, according to the National Bureau of Statistics (NBS), live below a Dollar per day. But the troubling twist to the law, he said, is that it doesn’t really define what basic food is, which leaves room for abuse. For instance, the FIRS has been in a running battle with producers of packaged water on whether the item falls under the radar of VAT, given that the product has undergone processing and packaging. FIRS also argued that the package water was now a luxury item. The Federal High Court ruled that packaged water was a basic item, irrespective of whether it was packaged or not.

For an accountant with an indigenous oil company, Mr. Suraj Oyewale, there is a valid cause for Nigerians to be apprehensive over the increase in the rates because VAT directly affects the consumer, whether they are individuals or organisations.

Stressing that the move would be anti-people because what sells for N105 would now go for N110, he said it might not go down well with Nigerians. However, he noted that, from government’s angle, it is inevitable and a quick-win to shore up its revenue.
“From the reality of things in Nigeria, it would be anti-people; the poor would suffer and would bear the brunt. What it means is that the consumer would part with more money — or less value if the price doesn’t change,” he argued.

Associate Professor of Economics at the University of Lagos (Akoka), Femi Saibu cautions that government has to be careful with the policy as Nigeria, over the years, had a low VAT rate because it has other sources of revenue, just as other countries with resource-based incomes adopt a low tax regime.

“It is not a crime that we have a low tax rate, but the question is what do we do with what is realised. Tax rates are political as it rides on the perception of the government of the day on how it wants to source its income and finance its government and what policy instrument to be used in stablilising and stimulating the economy. Comparatively, Nigeria has a low VAT rate. The justification for VAT is that everyone cannot be captured in the income tax. The income tax almost passes for a compulsory levy, so VAT is an attempt to capture other people who are either not working for anyone or do not have any established business and are benefiting from government’s services. It is supposed to capture a broader number of people,” he said.

But many have decried the move, citing the case that Northern Nigeria doesn’t rank high on consumption of goods, which would mean revenue generated from the South would be used to maintain the North, a situation, they say, would return Nigeria to it’s early days in history of the North subsisting on the South.

To this, Saibu said taxation shouldn’t be viewed from narrow goggles of regions or religion, as it serves to boost revenue and as an instrument to curtail consumption of certain goods.

“A government would only charge VAT on products that are price inelastic. In that case, it is goods that people have formed a habit for or that are luxurious that generate the higher revenue for government. That is why government does not tax necessities that cut across societal divides. For instance, if anyone has enough money to spend on drinking, which is not a necessity, then such a person should be ready to pay the price. People drink in Sabo areas in the North. Businesses in the South are not all owned by Southerners. I am not sure there is discrimination as to who patronises a hotel in Lagos or Abuja.”

Noting that the main concern should be how an increase in VAT would affect the middle class, he believes it is not yet time for government to change the tax rate.

“The tax rate may be relatively low, but absolutely high on the masses. The incident of increasing the tax would be higher on the poor than the rich. One may say that government doesn’t tax necessities, but the middle class items are being taxed. Therefore, we are going to be over burdening them. They have always provided electricity, security, water, by themselves and the little they have, government wants to take away.”

He said Nigerians get below average of what they ought to benefit from VAT and that government should cut the cost of collection to get maximum benefit, adding, “the cost of collecting tax should be very low such that the net value is high. For instance, what is the budget of the ministry of finance and how much do they generate. We need to get a ratio of tax collected and amount of money spent in the process. Waivers should be cancelled and tax net should be expanded to capture those who are outside.”

He charged government to initiate policies that would stimulate job creation and increase productivity so as to increase the tax bracket. Stressing the need to expand the tax bracket, he said, “Once we get opportunity to employ people, they too, would earn income to be spent. At the low rate, there would be more revenue for government. Government needs to provide infrastructure and increase productive activities in the country so that we can produce more goods for people to spend their money and get tax. It is not to overburden the existing payers. Less than 40 per cent of Nigerians pay taxes, it needs to be increased.”



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