A major challenge facing Nigeria’s economy is the diversification of its revenue from crude oil earnings base. This diversification has become necessary with the realisation that dependency on crude oil earning cannot sustain rising public expenditure. The economy faces the danger of being grounded if proactive efforts are not made towards sustaining the diversification of the revenue base.
The new policy of taxation increase in Nigeria is therefore directed towards achieving some specific objectives which include, among others, revenue generation and upholding economic growth. Recently the Nigerian government introduced the National Tax Policy (NTP). This is a policy geared towards shifting from direct to indirect taxation in Nigeria.
Value added tax (VAT) is simply called the goods and services tax (GST), and it is levied on the value added that results from each exchange. It is an indirect tax collected from someone other than the person who actually bears the cost of the tax. It was invented by a French economist, Maurice Leave in 1954 and was first introduced in France in April, 10, 1954.
Taxation is the life wire of every nation and the level of development of any nation most times depends on the amount of revenue generated through taxation. Taxation is therefore, one among other means of revenue generation of any government to meet the need of the both the government and citizens.
Globally, government is saddled with the responsibility of providing some basic infrastructures for her citizens. Among these are the provisions of schools, hospitals, construction of roads, bridges, dams, airports, seaports, railways. More so is the security of the life and properties of the citizens in the country against foreign as well as local aggression.
Just recently, the Federal government through the Federal Ministry of Finance announce increase in VAT rate of 50 percent which did go down well with the Organised Private Sector. The OPS reacted immediately and warned that if government decides to implement such policy, the proposed VAT increase would affect the manufacturing sector. Implementing it at this time would boomerang because the timing is inappropriate, especially at a time when the minimum wage of N30,000 was just agreed upon.
In a chat with Daily Sun, the Director General, of Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, said this would also worsen the already high unemployment position of the country which is above 23 per cent as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.
Economic realities of proposed increase in VAT
In terms of misery index rating, low per capita income, heavily lopsided income distribution pattern, the Nigerian economy will be in a more vulnerable state if VAT is increased. Without controversy, the burden of the tax would be shifted to the Nigerian consumers that are already struggling, the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted, many factories will witness serious downturn or wind down operations.
This would also worsen the already high unemployment position of the country which is above 23 per cent as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.
All taxes should be harmonize
We have advised government to widen the tax net rather than increasing the rate to meet the growing need for more revenue to address the development objective of the country. There is also the need to harmonize taxes/levies/fees payable by businesses in the country so as to attract more investment that would translate to higher productivity and more tax revenue for the government in the medium and long term.
Why we are worried
MAN as a strategic stakeholder in the nation’s development agenda, appreciates the need for government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil. However, government should thread with caution in the drive for improved revenue for the following reasons
The economy just recently exited recession with the fragile growth rate of less than 2 per cent recorded in 2018 and should be delicately managed. The precarious macroeconomic condition of the country requires palliatives that would improve investment and not higher tax burden.
The prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91 per cent growth rate amidst 2.6 per cent population growth ratethat are already cumulatively limiting competitiveness could be further worsened.
Any increase at this time would not be in sync with the standard practice that expects the administration and implementation of VAT to be effectedin a manner that distortion and possible adverse effect on the economy are minimized or avoided. An increased VAT will spur spontaneous increase in inflation rate occasioned by increased prices of goods and services.
The obvious resultant effects of implementing an increased VAT on the manufacturing sector includeslower purchasing power of consumers, sharp reduction in consumption, drop in sales, decrease in production capacity, lower Government revenue,increase in unemployment and stifled economic growth.
Unfair comparison of VAT rate in Nigeria and other countries in Africa forgetting the fact that macroeconomic dynamics and the level of competitiveness in these countries are not the same with that of Nigeria. The fact that many states of the federation also have other consumption taxes like VAT currently being levied on businesses should call for circumspection.
Standard considerations for Ideal VAT rate for Nigeria: Comparative enquiry
There is no doubt that VAT is an important revenue source to the Government for running the affairs of the country.
However, the principle of a good tax system is predicated on payment convenience, otherwise it could boomerang, leading to crowding out of businesses; more misery to the citizens and even lesser revenue to the Government. The Nigerian economy has consistently ranked top in Africa with only South Africa presenting a fair challenge. Years back, following the economic feat and potential of the country, it assumed an emerging economy status like China, India, Malaysia, Turkey and South Korea. Only South Africa and Egypt made this economic bracket in Africa.
It is important to state that on economic front, Nigeria should ideally be compared with the emerging economies and not just any country in Africa. Comparative economic policies should be predicated on what obtains in this economic frontier.
Therefore, an ideal tax policy should be such that takes into cognizance the status of the economy.An ideal VAT policy for Nigeria should take into account the current profiles of Nigeria’s Per Capita Income (PCI), National Minimum Wage (NMW); and Global Competitiveness. PCI and NMW will help highlight what will be the implication of upward review of VAT on the already depleted wellbeing of majority of Nigerians, while Global Competitiveness will present insight on the impact of such review on the real sector, particularly manufacturing sector.Sun