VAT INCREASES NIGERIA’S GDP

        Rilwan Balogun canvasses the strengthening of institutions saddled with responsibility of generating income for the government

As part of his effort to lay a solid foundation towards economic prosperity, President Muhammadu Buhari, on January 13, signed into law the hitherto Finance Bill, which basically came as a child of necessity, and which among other things, focuses on generating revenue for the government, facilitates the ease of doing business and raises Nigeria’s tax base with a view to meeting global best practice.

In a another stroke of economic rejuvenation, on January 20, Nigeria’s president in retinue of other crème de la crème in the economy and business pedestals, converged on London in a maiden program tagged UK-Africa Investments Summit, basically to showcase and promote the breadth and quality of investment opportunities across Africa. Chief among the subjects of discourse was the assessment of 2019 performance on economies of the participant countries and how best the UK government can assist in charting course for Africa’s development. This gathering, however, is not unusual, conferences in form of such had been held at both intra-region, regional and at global levels.

  While states can be equated as the miniaturized version of a federation, however, individual state’s performance in line with the global rating on ease of doing business in Nigeria is not far from being an eyesore. In Nigeria, even at state level, being components of a nation, it is not a novel scene seeing political candidates selling, among other things, their various economic plans and how they intend to transform their languishing economies to posterity. I could recall vividly, some candidates (now governors or opposition voices) reeling out their proposed plans for the economies of their respective states in the wake of the 2019 general election. Probing questions like: how would you grow the GDP of your state? How do you intend to optimize a perfect budget implementation? Expectedly, some of them managed to muffle their proposed economic agenda to the politically despaired viewers.

The tripartite concepts of tax system, ease of doing business and economic reform are essentials among the basic underpinnings of economic development of any country in the world. Those who are enthusiastic about national economy and are consistent with what’s up in the Nigeria’s economic sector would concur that part of the concerted activities by the government, both at national and state levels are different reforms, enactment of legislations and perhaps, to a lesser degree, institution reforms, with all geared towards sustaining in geometric progression, the sluggish acceleration indulged in by the Nigeria’s economy. These moves are unarguably necessitated by the fact that these trio concepts stimulate the economy of any nation. With the ugly experience of the striking grip of economic recession, witnessed between 2015 and 2016, Nigeria’s government has been perturbed, thus, the reassertion of the perennial cry by the government for diversification of the sources to its GDP. Bouncing back from the cocoon of recession in 2017, and the snail-pace movement of economic progression since 2017, the Nigeria’s government has been put on its toes on the need to resuscitate its failing economy.

 Generally, what constitutes the economy of a nation is the totality of its expenditure, revenue, personnel or manpower and indeed its natural resources. A sharp corollary can be drawn from the fact that the assessment of the World Bank’s ease of doing business and the consequential growth in the Gross Domestic Product is what determine the picture given to any vibrant and viable economy. Every government is no doubt concerned about the development of its society, thus conscious efforts are geared towards causing enduring increase in the state’s GDP. This is done by embracing any economic concept or policy that best suits its socio-political and economic idealism.

·         The kernel of this piece is on how governments grapple with the decision on how to strike a balance between the growths of GDP by either expansion of areas of coverage of goods that are taxable on one hand or an increase in the percentage of existing taxable goods on the other hand.

·         According to the index of doing business reports, 2020, which provides objectives measures of business regulations and their implementation across 190 economies both at national, regional, subnational and global levels, Nigeria jerked up on the ladder of ease of doing business from 151, 146 and 131 positions in years 2018, 2019 and 2020 respectively. The parameters which were used in assessing countries in terms of this are availability of infrastructure, registration of properties, tax systems, legal compliance, enforcement of trade rights, resolving insolvency and resolution of disputes. Decayed infrastructural development is one of the major reasons while multinational companies as well as small and medium scale enterprises go on extinction in Nigeria. On this note, Rachid Benmessaoud, country director of World Bank once stated that Nigeria continued to face the challenge of diversifying its economy thus making the country more business friendly across all sectors. In spite of this, most Nigerian states are still far from the frontier of global practices in all areas. For umpteenth times, it has been pinpointed by experts in political economy that the problem bedeviling all factors of progressive economy is institution. Ministries, Departments and Agencies (MDAs) by the government are underperforming, unreformed and dwarfed by corruption, more so, there is no proper implementation of plans and nationalistic commitment to governance towards the development of the country.

 Faced with inept and indecisiveness in solving its economic crisis, the Nigerian government appears to be politically inclined and convinced that, with increase in tax Value Added Tax percentage, general effective system of taxation and proper utilization of tax money in returns for investment growth, the economy of a country gets a progressive, though, steady economic turnaround. It in its bid to achieving this economic objective, the approach that has always been resorted to is the increase in the percentage of amount paid on taxes, especial VAT. This is done with a view to generating more revenue for the government. However, there is another school of thought in economic development that posits that instead of increasing the percentage of the amount paid on taxes, what should be done, instead, is propagation of a system of increase in the array of things that are taxable. While the former remains a tested and verifiable economy strategy that has been utilized by some of the developed countries, I choose to align with the latter which takes into cognizance that there are other lacunae or factors that can been inculcated into the system without necessarily stifling the investors with outrageous increase in the percentage amount paid on taxable goods.

·         Summarily, the point we are driving at here is that, from the political perspective, a good public relation strategy needs be cobbled together between the gap of raising the Internal Generated Revenue (IGR) of a state, by means of raising the percentage amount paid on taxes on one hand and the expansion of the area of coverage of the goods and services that are taxable on the other hand. Where the government takes to the former, that is, by raising the percentage of tax on every taxable goods and services, the consequential effect would be an albatross of stifling the growth of business sector, and particularly, worse affected is the Small and Medium Scale Enterprises (SMEs) which is a key driver of every progressive economy. The economic blunder could further be exacerbated, where there is no tell-tale infrastructural development emanating as a result of such increase in the percentage of the amount of tax.

  No doubt, the essence of all the moves by the Nigerian government lately, particularly the ones by the President Buhari-led administration is basically targeted towards exhuming Nigeria out of the pit of recession and economic retrogression. In the process of development, states not only increase the levels of taxation, but also undergo changes in patterns of taxation, with increasing emphasis on broader tax bases. Thus, in the developed world, taxes on income and value added taxes do the bulk of lifting in raising sufficient revenue to support the productive and redistributive functions of the state.

·         Contrary to the general presumption; economic development does not mechanically translate into increases in the tax revenue. For example, in India, income tax revenues have stagnated at around 0.5% of her GDP since 1986. Therefore, widening the scope of taxation to broad bases as income and value added is only feasible if accompanied by investments in compliance structure.

·         One of a striking features of a progressive economy is the capacity of its government to raise its GDP through fiscal mobilization. For example, on average, France, Germany, the Netherlands raised their GDPs through tax revenue which dismally was around 12% of the then GDP, which by the new millennium have risen to 46%. Same with US whose tax’s contribution rose from 8% to 30%. According to the study carried out on the increase, the underpinning of these hike, in these countries’ GDPs are a number of tax innovations which included the extension of the income tax wide population. The governments in these countries were able to facilitate large scale compliance with the income tax, which required states to build a tax administration and also implementing withholding at source. Such investments in fiscal capacity have enabled the kind mass taxation, now regarded normal throughout the developed world.

 With the new Finance Act, which comes with increase in VAT from 5% to 7.5% increment and some other exemptions; this may irk the masses and may inveigh the acceptance of the government at the federal level from the masses, thus making it anti populism. For example, Djibouti as a country strategically located at the horn of Africa’s continent, with less buoyant economy like Nigeria, its rank in the spectrum of the ease of doing business has moved from 154 to 99 from 2018-2019 respectively. In a bid to achieving the long term economy plan, the Djiboutian government has strengthened its service-based economy which entails the aviation, sea, tourism and banking systems. Thus, human capital development, infrastructure development and strengthened sector through public private partnership were considered instead of increase in tax ratio.

Balogun, a legal practitioner and economics enthusiast, wrote from Lagos