On the Pressure to Increase Value Added Tax

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The federal government should not be indiscriminate in the application of any increment in VAT to avoid bringing further misery on the vast majority of the population, writes Vincent Obia

Attention in Nigeria at the moment is centred on the dwindling government revenues occasioned by the sharp fall in crude oil prices. Over the past months, there have been attempts to apply various fiscal strategies aimed at cushioning the effect of the fall in revenue. Practically, there is a great deal of pressure on government at all levels to increase taxes. Vice President Yemi Osinbajo said recently that the current five per cent Value Added Tax rate in the country was very low, adding, “We are focused on increasing the taxpayer base in the first instance this year.”

Osinbajo was actually re-echoing the views expressed in January by managing director of the International Monetary Fund, Christine Lagarde, during her visit to Nigeria. Lagarde had said, “The current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.”
Lagarde was right in her submission. Under EU law, the standard rate of VAT in any EU state cannot be lower than 15 per cent.

In the United Kingdom for instance, the default VAT rate is the standard rate, which is 20 per cent since 2011. But it is also important to note that some goods and services are subject to VAT at a reduced rate of 5 per cent (such as domestic fuel) or 0 per cent (such as most food and children’s clothing), while others are exempt from VAT or outside the system altogether.

Though, Minister of Budget and National Planning, Udoma Udo Udoma, said in January, while reporting on the outcome of the National Economic Council meeting, that there was no plan to increase neither the Value Added Tax nor the corporate tax. Udoma, who stated this at the National Assembly while giving an update on the 2016 budget, was obviously reacting to fears about the adverse effect of a VAT increment on the already impoverished masses following Lagarde’s suggestions.
It is not that Nigerians are averse to policies that would guarantee more revenue for the government, but they are concerned about the negative effects of such policies on their cost of living.

VAT is calculated at five per cent of the value of all taxable goods and services and it is one tax that is paid by everyone, irrespective of social class.
If the intention of government is to raise revenue to improve the welfare of the vast majority of Nigerians, a selective approach can be adopted to increase VAT without causing economic harm to the masses. About 90 per cent of Nigerians would suffer greatly as a result of inflation, which is already approaching 13 per cent, if VAT is increased on goods and services that most people consume. There are fears that the inflation rate may go up to 19 per cent or more if VAT is indiscriminately imposed.

It could lead to spiral inflation and create more problems for the Central Bank of Nigeria in terms of discharging its core mandate of maintaining stability in the economy. Inflation is a plague that impoverishes people, particularly, those with static incomes.
An across-the-board VAT increase would reduce consumption, as the people’s purchasing power is eroded by inflation. Manufacturers of consumer items will, in turn, reduce production because of dwindling demand. This would have repercussions for employment and national productivity.

Anything that would drive inflation beyond the current rate is, certainly, not in the interest of the country. An across-the-board VAT increase would, definitely, cause prices to spiral.
But the federal government can identify areas that will not directly affect the vast majority of the people for the application of any VAT increment. VAT increase on luxury items consumed by affluent people would not hurt the majority of citizens.

Overseas air tickets and hotel accommodation are some of the areas government can earn more VAT revenue from without causing hardship for the masses. To discourage frivolous foreign trips, for instance, experts have suggested VAT of between 10 per cent and 15 per cent on foreign air tickets. On hotel accommodation, there are suggestions that any hotel above two-star should attract up to 10 per cent VAT.

But more importantly, the country needs favourable monetary policies to firm up its currency and increase government revenues without inflicting hardship on the people. The federal government needs to adopt deliberate policies aimed at ensuring that inflation does not rise beyond one digit and the cost of funds for the real sector does not go beyond five per cent, in order to expand productivity and create employment, experts have said. A strong naira is central in any effort to increase government revenue.

This can, however, not be achieved under the current CBN currency auction system, whereby dollar is auctioned every week and sold to the highest bidder. The highest bidders are in most cases not motivated by socially and economically responsible objectives. They may be people with slush funds who are willing to transfer it at any rate. But the manufacturers, who make useful contributions to the economy, would hardly win such currency bids, as they are likely to bid more conservatively.

This auction system, which ensures that a lot of naira is constantly chasing a few dollars, creates an appalling situation where the “CBN, which is supposed to defend the naira, is constantly defending the dollar,” according to economist Henry Boyo.

A strong currency would also be difficult to achieve under the current perpetual state of excess liquidity in the financial system, which compels the CBN to borrow money it does not need from the banks – the mopping up refrain – at outrageous interest rates, thereby creating a disincentive for lending to the real sector.

The President Muhammadu Buhari government needs to change the market pattern in the supply of dollar and naira in order to stabilise the naira.
Boyo says, “To solve the problem of excess liquidity, we have to liberalise the quantity of the dollar that CBN captures by paying dollar certificates to the three tiers of government. Once you do this, you dry up the excess liquidity and cause the naira to firm up.”
Without correcting the financial disparities, whatever revenues government may realise from VAT increase or other taxes would not have meaningful impact on the country.

Generally speaking, the shortfalls in tax revenues in the country are not so much a problem of rate as efficiency of collection. The immediate past Minister of Finance and Coordinating Minister for the Economy, Mrs Ngozi Okonjo-Iweala, told a Federal Inland Revenue Stakeholders Engagement Forum in Lagos on May 16, 2014 that a diagnostic study of the country’s tax administration by McKinsey & Company showed that 65 per cent of eligible corporate tax payers, especially from the non-oil sector, did not file returns to FIRS. This meant they did not pay tax. Plugging loopholes like this and correcting the disparities in the financial system would bring the government the much needed revenue without the further hardship that an indiscriminate increase in VAT is bound to cause for the masses.