VAT review: Squeezing a bleeding economy

Last week, millions of vendors, suppliers and sundry service providers took to emails, voice calls, WhatsApp and other chatbox platforms to align figures with clients and replace invoices ahead of the take-off of the new Value Added Tax (VAT) rate.

With effect from yesterday, costs of “VATable” goods and services increased by 2.5 per cent. An unpleasant marginal “add-on” that may not in itself cause an atrocious upset as it ordinarily appears, but as typical of any economic analysis, the devil is hidden in its multiplier effects.

Close to three decades since the General Ibrahim Babangida’s regime introduced VAT via Decree 102, there has never been an evident reform of the consumption tax in the scale of what is now being witnessed. The Federal Government, which says that only 15 per cent of VAT comes to its coffers, while the other federating units share the remaining 85 per cent, only recently realised that Nigeria’s VAT is among the least in Africa.

In strict monetary terms, the country’s VAT is low when compared with its peers. The standard VAT in Kenya is 16 per cent. In South Africa, it is 15 per cent while Egypt imposes a 14 per cent VAT charge. Standard VAT is gaining currency as countries are increasingly realising that a flat VAT is retrogressive. For instance, Kenya does not VAT food items.

In some countries also, certain sizes of purchases are VAT refundable, a sort of discriminatory approach, making it rather progressive. European countries such as Malta, Sweden, Turkey, Spain, Poland and Germany have all set minimum purchases that qualify for VAT refunds.

VAT, when it is discriminatory as common in different regions that have embraced the form of tax is not a mere revenue-generating medium but a fiscal policy used to address income inequality and achieve specific economic objectives. Hence, food items and other essential commodities are exempted in many climes. Countries have also used VAT to incentivise the consumption of professional services. VAT on professional service in Egypt, for one, is lower than the standard rate.

VAT can indeed be progressive when it takes more money from the rich and improves the economic wellbeing of the poor, and this includes raising substantially their net revenues. It is much when this is even complemented with better public utilities and social welfare, which depends largely on how the government uses the tax revenue.

Unfortunately, the Federal Government has no history of efficiency in public spending, but notorious for extravagance and misappropriation – a major worry as an average Nigerian ponders over heavier tax burden.

One hundred and sixty-eight countries have adopted VAT (by whatever names), a tax collected in small bits at every stage of production, but whose burden lies on the final consumers. However, when an economy is desirous of raising its public revenue profile, VAT is often not the first port of call, perhaps because of its extreme distortionary capacity.

VAT, like every consumption tax and income tax, affects individuals’ purchasing power (consumption), ability to save and invest. These three variables affect and are affected by the productive capacity of the economy.

VAT is not just any other tax as Nigerians are wont to believe. It is directly linked with the speed and scope of the growth of the economy. Countries that have realised this do not see it as a government’s automated teller machine (ATM), but an enabler and economic restructuring tool. Compare VAT with property or capital gain tax. Property or capital gain taxes are not targeted at those at the bottom of the economic pyramid, whose marginal propensity to consume is strong enough to keep the factories open, but the wealthy.

It is thus not happenstance that some leading economies think more of capital gain taxes when they want to plug short-term holes in their public finances and less of consumption taxes. Again, this raises another fundamental challenge about the country’s public sector administration – an absence of proper documentation – in which case it seems that VAT increase is convenience policy.

The argument by the Minister of Finance, Zainab Ahmed, and other public officials to the effect that Nigeria’s VAT is the least in the world is not only seen as uninspiring, but also seems to have narrowed the government’s thinking of the tax as a money machine.

Also, the argument by the Senate President, Ahmed Lawan, that the purchasing power of an average Nigerian would not be affected as the increment in VAT was targeted at luxury items seems to have betrayed the government’s lack of understanding of how the economy works.

Is electricity not going to be affected by the new rate? Are telecommunication service and banking services also exempted from VAT or is the Senate unaware that the poor also enjoy these?

That the government has been magnanimous in its VAT rate is a ruse. Nigeria’s tax system, in its entirety, deviates from the underlining principles of taxation- efficiency, fairness and conveniance. Weighed against global practices and the underpinnings of the concept of social contract, Nigeria ordinarily does not have any business in tax collection.

Despite the Federal Government’s claim of a robust anti-graft campaign, Nigeria sits at the bottom of global corruption index, the reason Prof. Godwin Owoh, a renowned economist and consultant to the World Bank said that the country should not be mentioned in the same sentence with a tax increase at this critical time of its life.

According to him, corruption is the biggest tax burden on an average Nigerian. When a country is extremely corrupt as Nigeria currently is, he said the malfeasance is a “tax on the citizens, and it is so costly that it has reduced millions of Nigerians to abject poverty and perpetual misery.”

Owoh also argued that increasing VAT to fund deficit without a commensurate downward review of bloated political office holders’ allowances is as structurally defective as it is morally wrong.

“This shows that the government is only interested in high volume cash to play with. You cannot raise VAT and maintain unjustified public officers’ salaries and allowances. It does not show that the government means well for the country and can be taken seriously,” he stated.

A report by the Nigeria Extractive Industries Transparency Initiative (NEITI) and Trust Africa indicates that the country loses between $15b and $18b yearly through Illicit Financial Flows (IFF). That figure could fund Nigeria’s annual budget about 10 years ago. The upper range of the estimate can fund half of the 2020 budget. The funds, which are stolen by public officials and their cronies, are originally meant for construction and rehabilitation of roads, hospitals, schools, bridges and sundry projects, as well as for the provision of security, pension and to increase power supply.

Each day, hundreds ‘rebate’ the looting of public resources via deaths, illness, epidemics, gridlock, waste of man-hours, unemployment, loss of investment, fire incidents and dozens of other made-made misfortunes that are not supposed to be challenges if the government were responsive, responsible and committed to the social contract it entered into with the people.

Nigerian households are possibly the highest spenders on supposed public utilities. With each new public policy or law comes an assurance of a better future. Sadly, the citizens realise each day that the share of spending on security, health, basic education, power, roads, etc, which the government should have used their taxes to provide for free has continued to balloon and take an increasingly larger share of their incomes. When Nigerians say each family is a local government, it is a real complaint that manifests in the monthly household budgets on neighbourhood security, generator fuel, children’s education and others.

The common challenges Nigerians are grappling with are taken for granted in most countries that the Federal Government races to catch up with in terms of VAT rate.

Ghana, a neighbouring country whose VAT the government has benchmarked its argument, provides quality free basic education to its citizens, whereas Nigerians are too ashamed to register their wards in public schools.

Once upon a time, those eager to relocate abroad were mostly young graduates, artisans, poorly-remunerated individuals and the unemployed. The trend is becoming increasingly common among middle-class and high-flying professionals – a situation Chief Economist of PwC Nigeria, Dr. Andrew Nevin, says is deepening “skill shortage” in the country.

While the youths are fleeing for lack of economic opportunities, established professionals are moving their families abroad in search of better living conditions, especially for their children. The drift underscores the sorrowful state of the country’s infrastructure, and public services that the government has long abdicated.

The current inflationary pressure requires contractionary fiscal policy, but this sort of measure is most effective when the inflation is caused by an excess supply of money. But Nigeria’s inflation is largely cost-push, which could be best tackled by addressing the supply factors chief of which are defective market structure, exchange rate volatility and infrastructure. The government will achieve a better result by addressing these inadequacies, which however require more thinking.

When economy bleeds like Nigeria’s currently does, what is required are expansionary tactics that increase consumption, production and increase jobs. In fact, this is the thinking that has made quantitative easing a fanciful economic theory despite its tendency towards inflation.

President Barack Obama literally “dashed” Americans money via his famous stimulus package to buy back a booming economy when he assumed office in 2009.

Obama’s decision then, sure, had vagaries of hiccups, but it did bail an ailing US economy. This is the thinking when an economy contracts. Tightening consumption with higher taxes is not a solution to fixing a bleeding economy like Nigeria.