VAT INCREASE AND MATTERS ARISING.

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Monday comment1

The federal government should encourage FIRS to bring more people into the tax net, argues Chike Anyaonu

That the recent announcement of the proposed increase in the Value Added Tax rate from five per cent to seven-and-half per cent is generating ripples and knocks is not unexpected. The concern of those opposed to the increase, including this writer, does not only border on the rate of the increase (which is 50 per cent), but also on the justification given by government for its proposal.

It is important to note that before now, the Federal Inland Revenue Service (FIRS) under the leadership of Mr Fowler had mulled over the same idea. It is therefore not in doubt that the latest product is an escalation of that particular idea up to the Federal Executive Council by the FIRS. All the same, if the  idea of raising VAT, according to reports, is for the states to be able to pay the new minimum wage, then governments at all tiers must be advised to first of all start to curb wastes in governance and embrace austerity measures through which they could make and save money sufficiently.

The fact is that even before now, many state governments have not been able to meet this particular obligation of payment of salaries, thereby resulting in bailout measures of some kinds in the past. Even as we speak, some state governments are owing salaries, creating serious doubt as to the capacity of those states, and indeed others to be able to pay salaries even after the proposed increase in VAT. Governors must go for a serious paradigm shift in fiscal discipline. They should not only initiate effective and efficient resource management and control mechanisms that eliminate all manner of waste in governance but also appoint experienced and talented persons into key offices. It must not be business as usual.

As stated earlier, even if VAT is raised to 20 per cent many state governments will still be unable to pay salaries. The federal government will be deceiving itself by thinking that it is only an increase in VAT that will guarantee a rise in government revenue for settlement of salaries. I am to think that such spin and assumption is both funny and untenable. Value Added Tax payment is borne by the buyer, and ultimately pushes up the cost of the products. It results into inability to buy more for the buyer, or sell more for the seller. It therefore reduces volume or turnover and cripples the production end. Unless government is using it to control unending longing of Nigerians for exotic products and ostentatious lifestyles.

This takes me to the fiscal reforms that have been going on in China, whose model is copiously being referred to as one that promotes both fast economic development and recovery in time of downturn. For about three years running, China has been struggling to grapple with the negative effects of her trade war with the United States of America which reportedly caused internal glut levels and forced industries to lower capacities on output. Dwindling revenues for companies also resulted in mass retrenchment of workers. Chinese government was bothered this could cause internal strife and therefore quickly reduced its VAT rate from 7.5 % to 3% at the moment. Thus, the implication is glaring sensitivity of government to the plight of China’s industrialists and citizens at large. Not only that, China is paying her old citizens of retirement age an aggregate of 700b USD to energise its economy by improving the purchasing power of the citizens so that their industries will continue to survive. It is also investing billions of dollars to support her citizens trading beyond their boarders. A trend similar to that of China is happening in Ghana, a neighbouring West African country, where VAT rate was not only reduced recently, but also abolished in some instances.  According to Ghanaian tax officials, the measure was to fast track the country’s industrial revolution and economic growth. The examples of China and Ghana alone speak volumes in terms of the benefits inherent in such measures.

Here in Nigeria, not minding the crippling operating economic environment, from lack of basic infrastructure to astronomic rise in the cost of diesel and other inputs, government is proposing to increase her VAT rate. So the question is, why is Nigeria’s case different and in reverse? The answer can only be located in the corruption and squandermania tendencies in the land. A monthly FAC meeting in Abuja gives the state governors the money to fritter away in the name of monthly allocation sharing without anything on ground to show for it. People have completely lost confidence in government as there is no concrete evidence to show what it is doing with the resources available to it. This is impinging on tax collection as not many people will be willing to pay their taxes unless it becomes so compelling.

 To run an industry in Nigeria is not easy. Industries should be encouraged to operate at their optimal levels. Government should try to promote and encourage rapid industrial development to generate employment for the teeming unemployed youths in the country. Startups are not finding it easy to access capital, massive layoffs happening everyday are indicating that industries are bleeding badly. The proposed increase is bound to bring some negative effects on the economy. It is a sure road map to economic ruin as far as the Nigerian situation is concerned.  Government must therefore not fall to the allurement of increase in revenue to further destroy a suffocating and badly battered economy.  My opinion is that the federal government should drop the idea completely and give FIRS every encouragement to concentrate on its highly commendable drive to bring more tax-paying stakeholders and operators into tax rendition compliance status.

Meanwhile, all eyes are also on the recently constituted Economic Advisory Council as they settle down to address their mandate. The macroeconomic analysis of the effects of the proposal in question is under such mandate. Their advice to the president in this respect would likely determine the kind of confidence they will generate on the part of the masses. All said and done, the solace of the common man who will obviously bear the effects of the proposed increase is that the decision of the Federal Executive Council is not final. The proposal will still have to be legislated upon by the two chambers of the National Assembly. If everything else fails, I am sure that the senators and the House of Representatives members are not strangers in this country. And unless their own economy is different, there is every reason to expect that they will find a resolution and settlement on the side of the masses.

 Anyaonu is Director, International Center for Human Development and Rule of Law