by Peace Oluwadara, AJALA

Tax professionals seek increase in indirect taxation to improve revenue[1]

Policy Issues: Commerce, Industry, Economic Growth and Development.

Following the Federal Government’s reported plans to increase Value Added Tax (VAT) rate by fifty percent, tax professionals have reportedly maintained that there is the need to increase indirect taxation to generate more revenue for the government. President and Chairman of Council, Chartered Institute of Taxation of Nigeria (CITN), Dame Gladys Simplice, who said the institute welcomed the development of the 2019 Finance Bill, noted that the bill is seeking legislative backing for increase in VAT rate. She noted that the Finance Bill when passed into law, will among others, promote fiscal equity and tax incentives to mainstream small and medium scale businesses in driving economic growth and development. This, she stressed, will also encourage dynamic growth in government revenue drive, and give legislative backing to measures geared towards addressing loopholes in tax laws.

Laden the Oxen!

In 2007, the Federal Government of Nigeria attempted to increase the VAT rate by 50% (from the current 5 per cent to 7.5 per cent). The decision was however strongly opposed at the time, resulting in the suspension of the proposed increase.[2] Twelve years after, this same policy has been revived and has not only gained more traction, but has now been approved by the Federal Executive Council[3]. The move is reportedly a strategy and measure to raise funds for the implementation of the new minimum wage about to be passed into law by the National Assembly.[4]

In March 2019, the chairman of the Federal Inland Revenue Service, Dr Babatunde Fowler, stated thus:

“By the end of this year, we should be ready for an increase in the VAT. A lot of Nigerians travel to Ghana and other West African countries and they can see that theirs is much higher. They pay when they go for those trips. We should be ready for an increase in VAT.”[5]  

The preceding excerpt is an apparent display of a short-lived thought process, as its reasoning is predicated on the assumption that it is a majority of Nigerians that travel to other countries and pay higher VAT rates in those countries. The reasoning excludes the existent data stating that the combined wealth of Nigeria’s five richest men ($29.9 billion) could end extreme poverty at a national level, yet 5 million face hunger.[6] More than 112 million people are living in poverty in Nigeria, yet the country’s richest man would have to spend $1 million a day for 42 years to exhaust his fortune.[7] With a huge percentage of the country’s population resident at the bottom of the wealth pyramid, the FIRS Chairman’s assertion may seem rather insensitive and illogical. This is as the people rich enough to travel out of the country and pay higher VAT’s in those jurisdictions, may likely also be able to afford a good standard of living should there be an increase in the VAT rate back at home. The larger population however who have hitherto lived from hand to mouth, will have lesser purchasing power and have their situation worse off than it previously was.

In Nigeria, the Value Added Tax (VAT) is payable on goods and services consumed by any person, be they corporate entities or individuals. According to the Value Added Tax Act Cap V1 LFN 2004 (as amended)[8], certain items like commercial vehicles and spare parts, fertiliser, diplomatic goods and others, are excluded from VAT. Asides these, all other goods and services not listed under the exemption clause, will invariably be affected. The 50% increase in the rate will thus have immense effect on the price of goods and services not included in the VAT exception list and may in turn affect the country’s inflation rate. True as it may be that the increase may expand fiscal revenue in the country, is the ultimate essence of revenue not to better the standard of living of the people via better infrastructure and accessibility to basic life necessities? How effectively has past revenue been harnessed to better the lives of the people? How has previously-generated revenue translated to good roads, affordable and standard healthcare, decent housing, quality and affordable education and such likes, for the people? This is by no means intended to cast aspersion on the claims of progress being made by the current administration, but a call for transparency as regard the disbursement of past revenue, alongside a call to reflect on whether this is the best of all possible strategies.

If salaries remain constant, workers will be affected, as the same income will only now purchase less than it previously could. Market operations may also likely be affected as increase will either reduce or discourage consumption. Seeing as people will tend to buy fewer items to save cost, businesses may be hurt and invariably the employees.

“The great advantage of paying attention to bargains, it seems to me, is that it is more likely to result in feasible prescription for policy-makers in business or in government and politics than other approaches.”[9]

  • Strange’s States and Markets, Page 42, Chapter One, Part One.

Susan Strange points out a very vital tool for policymaking in every sphere of governance and the economy – bargains. In political economy, bargains are referred to as trade-offs; a situation in which both the prospective gainers and losers of an intending policy, are engaged and given the opportunity to bargain and give each other concessions. In the event where an actual stakeholder engagement may not be feasible, critical thinking and brainstorming sessions ought to be held envisaging possible outcomes and effects on various categories of people. Despite the propensity to introduce earmarked taxes or increasing rates with the intention of raising revenue, proper thought must be put into the impact that such action would have on the people, on businesses and on economic activities.

In policymaking, the people for whom the policy is being formulated, ought not to be made poorer than they already were. According to Adam Smith, when governments interfered with tariffs or taxes, they made their people poorer rather than richer. The solution may therefore not be in an increase, but in widening the tax net.

 

[1] This article was taken from The Guardian Newspaper. Available at: https://guardian.ng/appointments/tax-professionals-seek-increase-in-indirect-taxation-to-improve-revenue/. Date Accessed: 26/11/2019.

[2] Deloitte Nigeria; Nigerian Government Proposes 50% Increase in VAT Rate. Available at: http://www.mondaq.com/Nigeria/x/847174/tax+authorities/Nigerian+Government+Proposes+50+Increase+In+VAT+Rate. Date Accessed: 26/11/2019.

[3] Deloitte Nigeria; Nigerian Government Proposes 50% Increase in VAT Rate. Available at: http://www.mondaq.com/Nigeria/x/847174/tax+authorities/Nigerian+Government+Proposes+50+Increase+In+VAT+Rate. Date Accessed: 26/11/2019.

[4] The Vanguard Newspaper; FG plans 50% increase in VAT, other taxes. Available at: https://www.vanguardngr.com/2019/03/fg-plans-50-increase-in-vat-other-taxes/. Date Accessed: 26/11/2019.

[5] Ibid.

[6] Ibid.

[7] Oxfam International; Nigeria: Extreme Inequality in Numbers. Available at: https://www.oxfam.org/en/nigeria-extreme-inequality-numbers. Date Accessed: 26/11/2019.

[8] The Value Added Tax Act Cap V1 LFN 2004 (as amended). Available at: https://lawsofnigeria.placng.org/laws/V1.pdf. Date Accessed: 26/11/2019.

[9] Susan Strange; States and Markets. Page 42.