How VAT Hike May Affect You, by Experts

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On September 15, 2019. 

By Victor ‘Tunde Oso

The Federal Government said, last week, that it had accepted the proposal to increase the rate of Value Added Tax (VAT) from five per cent to seven point two per cent with effect from 2020. Experts speak on how the hike affects you.

Mr Segun Ajayi-Kadir, D-G, Manufacturers’ Association of Nigeria MAN

It is rather unexpected and ill-timed. Whilst it is ostensibly aimed at increasing the revenue portfolio of government, it will impose a significant burden on the private sector and on the average Nigerian. The effect on market operations, especially the informal sector, will also be high. I said it is unexpected because I assume that we should be pre-occupied with lowering the rate of taxes and expanding the tax base.

It is ill-timed because VAT is a regressive tax that takes a larger percentage of income from low-income earners than from high-income earners.

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So, when this is coming at a time that the earnings of an average Nigeria are dwindling, there is cause for concern. We have been able to keep the inflation rate from an alarming increase, so, we should be mindful of measures that may reverse this positive trend.

Even though the Minister expressed the hope that it will boost the capacity of the states and local government to pay the minimum wage and so on, it may very well be the case of giving with one hand and taking back with the other. I think the government may need to reconsider this proposition. Happily, I think the minister said it will still be subject to stakeholders’ engagement and I commend her for being sensitive to the all-important requirement for civic engagement and policy dialogue.

The process may as well end up with more creative ways to achieve the same objective. In any case, the National Assembly will have to concur and amend the VAT Act in order to give effect to the increase. I hope these processes would highlight the inherent downsides and suggest alternative measures that the government could employ to achieve increased revenue. This is the trend among some neighbouring countries; some have labelled such taxes as “nuisance taxes”.

I recall that our Ghanaian neighbours alluded to the fact that they were reviewing downward the taxes to provide relief for business and re-energize the private sector. You will recall that our report on CEOs confidence index indicated that part of the major issues confronting manufacturers in Nigeria is a high build-up of unsold inventory. Manufacturers are actually investing in expansion or acquisition of warehouses to store unsold product.

This is majorly attributed to buyers’ low purchasing ability or apathy. We already fingered the inconclusive minimum wage increase exercise across the country as a contributing factor, so any price increase would certainly accentuate this trend and may in turn negatively impact productivity.

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In summary, the increase in VAT would compound the incidence of the high build-up of unsold inventory, abrade the purchasing power of the average Nigerian, erode the profitability of the manufacturing sector and exacerbate its sub-optimal performance. I believe the government will diligently follow-through the stakeholders’ engagement and at the end of the day, we should take a position that favours productivity and supports improved well-being of the average Nigerian.

Mr Muda Yusuf, D-G, Lagos Chamber of Commerce and Industry LCCI:

The proposal to increase Value Added Tax (VAT) from 5% to 7.2% amounts to an additional burden on investors. Profit margins, investments growth, consumer purchasing power and competitiveness of firms will be adversely impacted by this review. Already, businesses have been grappling with the challenges of multiple taxations, high import duty, high regulatory charges, exclusion from the official foreign exchange market and high energy cost. It is also disturbing that in Nigeria, VAT is not treated as a consumption tax. Most often, VAT is imposed on the entire value chain of production and investment. Intermediate products are also often subjected to VAT. This is why investors would worry about the proposal to review the VAT. We acknowledge that the government is currently facing severe revenue challenges, which have been impeding its capacity to provide basic services and infrastructure to the citizens. But it is important to realize that there is a relationship between investment growth, private sector development, economic performance and revenue performance of government. It is against this background that we urge the government to scale up its commitment to the creation of an enabling environment for investment in the country and this should be from the perspective of the policy environment, regulatory environment and the macro-economic environment.

Comrade Joe Ajaero, President, United Labour Congress of Nigeria ULC:

The United Labour Congress of Nigeria (ULC) received the news of the proposal by the Federal Government through the meeting of the Federal Executive Council (FEC) that held yesterday to hike the value of the Value Added Tax (VAT) by a whopping 40% to 7% from the previous 5% with repugnance and a sense of indignation.G10

We are indeed worried that governance in Nigeria has rather become a tool for impoverishing the people rather than to make the lives and living of the populace more beneficial. The purpose of government, we have always known, is anchored on the drive to provide policies and programmes that are centred on the promotion of the welfare of the citizenry but one wonders why we have seen a continuous reversal of this fundamental pursuit of governance in Nigeria now and in the past.

ULC views this proposed hike as one of those actions of a government that are not founded on making positive impacts on the lives of the masses of Nigeria. The consequence of this hike on the lives of Nigerians that are already suffering horrendous deprivations as a result of ill-thought-out programmes of various governments is dire and is capable of exacerbating the poverty that has ravaged the peoples of our nation. We do not think that the government realises the depth of misery that pervades our nation and may have completely detached itself from the people it ought to succour.

Definitely, prices of goods and services will go up as a consequence with its attendant implications for the cost of living pushing down a further greater number of Nigerians into the cesspool of poverty. Manufacturers and businesses in an attempt to recoup the extra cost as a result of the hike in VAT would dump it on the consumers and this would snowball into another round of increasing prices, triggering another inflationary round that would ultimately undermine the economy.

ULC is worried that a government that has put all manners of challenges on the path to paying the new minimum wage of N30, 000 to Nigerian workers would find it so easy to foist further hardship on the same workers and peoples. This proposal cannot find any reasonable explanation as it cannot be anchored on any plausible economic objectives.

Congress, therefore, calls upon the Federal Government to have an immediate rethink and do away with this proposal as it is very wrong-headed. It is not just anti-people but also runs against the nation’s developmental objectives.

The National Assembly must use this opportunity to show leadership. It must reclaim its lost connection with the Nigerian people by rejecting this proposal.

The government should show us what it has done with the revenue it received from the petroleum product price hike and the various billions of Naira it has realised through stamp duties and other charges it has levied on hapless citizens these past years.

The returned Abacha loot, which has remained largely unaccounted for must be shown to have been utilised for Nigerians. All the recovered loots and the huge revenue the Federal Inland Revenue Service FIRS, has reported ought to plug whatever fiscal holes that may have emerged albeit because of less than careful handling of our nation’s coffers by unconscionable politicians.

ULC feels that it is important that the government must return the people as the centre of its governance efforts. It can only do this if it purges itself of the urge to wring more money out of the already impoverished people of Nigeria no matter the pressure. This hike in VAT at this time is totally unacceptable.

Nigerian workers cannot afford it! Nigeria as a nation cannot afford it!! Let us step it down!

Dr Obadiah Mailafia, one-time Deputy Governor, Central Bank of Nigeria:

We understand that the Federal Government has received approval from the Federal Executive Council to increase VAT, which is a form of consumption tax on goods and services produced within the country. We understand that the VAT is to be raised from 5% to 7.2%. It is a modest increase.

For several years the International Monetary Fund IMF had been calling for an upward review of the consumption but the government had been reluctant until now. I suppose the deciding factor is the revenue constraint that is now beginning to bite hard.

The budget deficit continues to expand even as the government is finding it increasingly hard to balance the budget. our debt profile recently reached the staggering figure of N24 trillion (about $70 billion). A huge chunk of revenues is going into debt servicing.

So, the government seems compelled to explore ways and of boosting revenues to ensure solvency in terms of government business. My only concern is that the timing is wrong. We are still in an iffy recovery. We would be lucky to attain 2.0% at year’s end in 2019.

In such a weak growth environment, the received wisdom is to lower taxes, not increase them. You don’t want to kill the golden geese that lay the eggs. From simple economics, when you raise VAT, the inclination is that consumers will cut back on their purchases of goods and services.

In a weak business environment, that is likely to lead to a fall in aggregate demand, which in turn will weaken the economy further. I would have preferred that we optimise the entire tax administration framework to ensure that all those who are outside the loop are fully integrated.

I suspect that only the top and well-established corporates get to pay VAT. A huge chunk of it goes uncollected. So, let us work more rigorously on tax administration before we look into possible increases.

Having said this, our VAT is quite low by the standards of our comparators and neighbours. Ghana recently reduced theirs from 15 to 12.5%. Our neighbouring Francophone countries have a VAT rate of around 18 %. While our VAT rates are comparatively modest, our corporate tax rate at 30% is among the highest. What we need is a balance, prudence and pragmatism.

The biggest task before this administration is creating a strong and competitive business environment where markets flourish. The environment of today is harsh and nasty for business. The focus must, therefore, be on how to build up businesses and ensuring prosperity before we think of how to tax firms and consumers in order to boost revenue.

Prof. Ken Ife, Co-Chair, European Union–AFRICA Business Task Force:

It is long overdue. Good the increase is gradual but must protect food to be less inflationary. At 5%VAT, Nigeria is the lowest in ECOWAS. VAT revenue benefits states and federal governments. It needs to calibrate not to depress growth, exacerbate inflation and poverty.

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