The Ill-Advised Timing Of Buhari Governments’s VAT Rate Increase

The Ill-Advised Timing Of Buhari Governments’s VAT Rate Increase [MUST READ]

By Opinions | The Trent on September 12, 2019
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Nigeria's President Muhammadu Buhari
Nigeria's President Muhammadu Buhari | Benoit Tessier/Reuters

In a certain armed robbery siege of a luxurious bus coming to Lagos from Onitsha, the robbers recovered so much money from the passengers to the delight of the armed gang leader that he ordered the robbers to uncork their guns to ensure that nobody was hurt.

The high and bloodthirsty robbers asked why. His retort: the customers had been so good that he can’t in good conscience have anything happen to them as that was going to reduce their chances of a repeat business. So, even professional armed robbers understand that killing people would mean hurting business growth. We are their customers and we are Kings.

This is the thinking that seems to be missing in the Federal Government’s proposed increase in vat from 5% to 7.2%. The country may be broke but it is difficult to see how the timing of this tax increase can be worse. It can only hurt those already paying tax and may probably kill some of them. This means, less revenue for the government in the long run.

Nigeria’s tax revenue to GDP is one of the worst across comparable countries at about 6% of GDP. For some countries like South Africa it is about 22% of GDP. The average for 21 African countries is about 18% of GDP. The reason often adduced for this low rate for Nigeria is that nearly half of the Nigerian economy is informal which pays no tax. Unfortunately, the structure of most other African countries is the same and they have managed to collect tax. Nigeria needs to do the same. There’s sufficient headroom to increase tax 3 times without touching rates.

The FGN could have continued working on improving tax administration rather than increasing tax rate. If the Fowler – Kyari letters revealed anything, it is that the tax base for non oil sector was widening. This means that it is possible to grow tax revenue without increasing the rate yet. This is where fiscal sustainability resides. Looping as many business as possible into the tax net is the real task, not bleeding the same set of guys already there. This amounts to those paying, subsidizing those not paying.

Because the economy is in some sort of docile gloom, even the tightening of tax administration is something that ought to proceed with tact in order not to kill the FGN “customers” – taxpaying businesses.

The economy is crying for reflation and doesn’t need the ongoing fiscal tightening. Corporate margins have been on a protracted compression for the last four years. Corporates and SMEs need cash to invest, employ (and put money in households to spend) and make sales to households to generate taxable revenue.

It is therefore cutting a notch deeper into the skin of the complying tax payers to increase tax rate at this time. The easy argument in favor of this move is that Nigeria has the lowest VAT rate of comparable countries. However, nobody is arguing about the increase by itself but the bad timing. It is awful!

Therefore, the whole essence of proceeding cautiously with tightening tax administration and not increasing rates at all, is to give businesses enough room to muddle through the deflated economy, survive, begin to thrive and therefore be there to pay government some good money both now and in the long term.

Supporters of the government will be quick to point out that it is just a proposal and that the implementation is subject to the amendment of the VAT act. Well, the government annexed the parliament and judiciary a long time ago so we know the law will be amended and that come January 2020, VAT will be 7.2%.

The timing issue aside, the government has done nothing about the disproportionate amount of revenue that’s wasted on recurrent expenditure. So it’s all the more annoying that it chose to increase tax rate ahead of doing something about the health of its spends.

VAT is. Sales tax so this is going to take its toll on the spending power of civil servants who are on the recently increased minimum wage……if this were when we had a labour Union, one would have expected a fight. Unfortunately, then Union has become a launching pad to mainstream politics so.

Chidi Ileka is a banker with 20 years professional experience. He was born the commercial town of Nnewi in Anambra State where he grew up. He is an alumni of All Hallows Seminary in Onitsha and University of Nigeria Nsukka, where he obtained a degree in Biochemistry. He holds an MBA from the prestigious Lagos Business School, and a diploma in International Trade and Finance from the Institute of Financial Studies United Kingdom. He has a keen interest in the dynamics of human behavior and progress. He lives and works in Lagos.

The opinions expressed in this article are solely those of the author. 

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