VAT Implications on Nigerians and Businesses.
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The proposed increase to the VAT (Value Added Tax) rate has been previously considered by the federal government, the VAT rate had increased to 10% in 2007, but the rate was returned to the 5% rate following opposition by certain sectors. Some believe that the government needs to consider this as an opportunity for a broader VAT reform in Nigeria, beyond merely increasing the VAT rate. One of the reasons the government gave in support of a VAT rate increase is that Nigeria’s 5% VAT rate is the lowest in Africa. However, those arguments do not acknowledge the difference between the VAT regimes in the other countries and Nigeria. For a government that has increasingly financed its fiscal deficit and major infrastructure from borrowings, there is no doubt that it needs more innovative approaches to scaling up its revenue capacities to meet its growing funding commitments. These commitments amongst others include payment of the new minimum wage and funding of the 2020 budget. It was against this background that on September 11, 2019 the Federal Executive Council agreed to a federal government to undertake this increment.
The federal government is keen on making more money and has decided the people have to pay for it by way of an increase in value added tax. In 2018, the Federal In-land Revenue Service (FIRS) said it raised N5.32trn in revenues. Compared to previous years, the 2018 figure is the highest collection till date. The proposed VAT increase is coming against the background of political and economic uncertainty occasioned by long-standing corruption, poor economic management and bogus budgetary financing. Talking about budget, the minister of finance, budget and national planning, Hajiya Zainab Ahmed revealed that the Federal Executive Council (FEC) has approved N10.07trn 2020 budget and a 44 per cent hike in Value Added Tax, (VAT) from 5 per cent to 7.2 per cent proposal for onward transmission to the National Assembly for consideration and approval.
What Is The Implication of This VAT Increase?
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. In effect, I think this is 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 counter-intuitive 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.
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 a current inflation rate of over 11 per cent, the outcome of the proposed VAT increase is very critical given that the Central Bank of Nigeria is keen to contain inflationary pressures in the economy and bring inflation back to a single digit within a target range of 6-9 percent. It is thus expected that the rise in VAT would likely lead to a rise in inflation.
Furthermore, the increase will make running business scary for SMEs. Informal businesses which prior have intentions to join the formal sector by registering with the Corporate Affairs Commission (CAC) will be discouraged. The focus could have been with closing up on businesses that shy away from paying tax and expanding the tax net than increasing the tax percentage. This could possibly lead to the shutting down of many SMEs. This will certainly lead to adverse economic times for Nigerians.
FORECAST AND RECOMMENDATIONS
I think the VAT increase is expected to kick in the first quarter of 2020. According to a government announcement, the process of increasing the VAT rate will involve extensive consultations with state governments and local government authorities, and others in the public and private sectors of Nigeria. The process could ultimately result in amendment of the VAT law before the new VAT rate would be effective in 2020. It is very important as a wise businessman to plan towards this new tax regime. Businesses like Dangote group and others have already registered for the tax credit scheme. The Chairman of the Federal Inland Revenue Service, Tunde Fowler, told Reuters on Wednesday that over 10 indigenous firms have applied to have their taxes slashed in order to help the country bridge its infrastructure deficit. This is a way to avert the impact of the new tax regime. Example of this was the signed Executive order 007 by President Muhammadu Buhari on January 25 2019, paving the path for Dangote’s 30 per cent tax rebate for building sections of the abandoned Apapa port road, to become law. With the impending tax increase, businesses will go for different tax rebate opportunities to ameliorate the impact.
Businesses in Lagos will pay 12.2 per cent on the sale of goods and services once the 7.2 per cent Value Added Tax increase comes into force. The Lagos State Government had since collected tax from restaurants and other retailers under a sales tax law despite a Supreme Court ruling against such in September 2018. In Lagos, consumption tax is already 10 per cent because Lagos State charges five per cent VAT and there is also another consumption tax of five per cent. So, for Lagos State, automatically, consumption tax is 12.2 per cent. This will have adverse effect on business in Lagos state. The implication is businesses will start planning towards relocating to neighboring states to operate from there. SMEs and Manufacturing companies will cut down on staff to save cost of servicing the new tax increase. This VAT increase will toughen the ease of running business, coupled with the intended increase in electricity tariff also.
VAT increase will lead to higher inflation, interest rate hike, and more unemployment and generally make people poorer. Any increase in VAT rate without a registration threshold and zero rating of basic consumption will increase burden on the poor and SMEs contrary to the 2017 National Tax Policy. Trying to expand the VAT net while also increasing VAT rate at the same time is a faulty tax strategy. Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring robust administration rather than by increasing rate.
The Nigerian customs has earlier this year, increased import duty from N306 per dollar to N326 following the recent foreign exchange policy by the central bank. With the increase in VAT import duty is set to skyrocket again. This will discourage importation and increase prices in the market. The impending economic atmosphere is a pointer for proper planning for individuals and businesses. It is common that various taxable commodities will become scarce due to hoarding or under production. Panic buying will also be experienced weeks before the implementation of the new tax policy.
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