FSDH Urges FG to Increase VAT Compliance

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By Obinna Chima

Analysts at FSDH Merchant Bank Limited have said the federal government can earn more revenue from the Value Added Tax (VAT) in Nigeria by developing strategies to increase household consumption and increase VAT compliance.

The firm stated this in its latest monthly economic report.

According to the FSDH, consumption data and revenue from VAT in the Federation Account Allocation Committee (FAAC) showed that the ratio of VAT revenue to household consumption averaged 1.07 per cent between 2014 and 2018, with the highest of 1.15 per cent recorded in 2014.  

This, it stated was significantly lower than the actual VAT rate of five per cent.

Speaking further on the report, the Head of Research at FSDH Merchant Bank, Ayodele Akinwunmi, pointed out that it was important to note that some household consumption items are exempted from VAT.

Therefore, the ratio of VAT revenue to household that government may not necessarily be equal to the VAT rate of five per cent.

The products and services exempted from VAT include all medical and pharmaceutical products and services, basic food items, baby products, books and educational materials and all exported products and services

“However, FSDH Research believes government can raise the ratio to 2.5 per cent with appropriate measures in place,” Akinwunmi explained.

He, however, said low VAT revenue could be linked to the large informal sector in Nigeria whose VAT is difficult to capture; non-remittance of VAT collected by certain collection agents and weak consumption in Nigeria

“If the consumption grows and the ratio of VAT revenue to GDP increases to 2.5 per cent from 2019 through 2023, government may be able raise VAT revenue from N1.09 trillion in 2018 to N3.47 trillion in 2023,” he added.

Speaking further, he suggested that measures such as leverage existing associations/ecosystems in the informal sector to encourage and aid in VAT collection and remittance to government; continue to work with the deferent operators in the financial industry to increase financial inclusion and reduce informal sector of the economy; enforcement of appropriate sanctions on any agent who defaults in VAT collections and remittances; organise sensitization programs for collections agents to educate them on their roles in VAT collections and remittances and deploying technology to capture VAT payers and give them incentives at the end of a fiscal year, should be adopted to enhance tax revenue in the country.

Others include the deployment of technology to capture the collection agents and to give them collection incentives at the end of the fiscal year.

“The efforts to increase VAT compliance and block leakages may increase VAT revenue by N8.25 trillion between 2019 and 2023 without increasing the VAT tax rate from five per cent.

“In addition, FSDH Research recommends the sale of government assets that are not currently profitable and are draining government’s meagre resources. This will generate income for the government in the short-term and save income for the government in the medium to long-term,” the firm stated in the report.

Commenting on the recent decision by the Monetary Policy Committee (MPC) to reduce the Monetary Policy Rate (MPR) to 13.5 per cent, from 14 per cent, he noted that there are limitations to the use of monetary policy alone to stimulate economic growth

“As a result, there are a number of complementary fiscal measures that the Federal Government of Nigeria (FGN) needs to implement to ensure that Nigeria achieves the desired goal of inclusive growth

“These measures relate to the provision of a more conducive business environment in order to attract investments, both domestic and Foreign Direct Investment (FDI)

“It will also require government to spend money in some critical sectors of the economy to stimulate household consumption to drive economic growth

“We understand that the government would require funds to implement these measures and pump money into the economy

“We are also aware that government’s revenue is low at the moment while her expenses both on recurrent and capital projects are growing

“Therefore, government needs to devise way to increase its ability to generate more revenue without necessary increasing tax rate as this may reduce household consumption and reduce compliance,” it added.