Armed with a twin-argument on the need to raise revenue and match the continental standards, the Federal Government is about to implement a hike in value-added tax rate from five per cent to between 7.2 and 7.5 per cent. First, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the sub-national governments in particular would need to fund the new minimum wage with the extra income from VAT. Second, at the current rate, government argues that Nigerians are paying the lowest VAT in Africa. It is a truism that modern governments run on tax, but beyond the mere increase of the VAT rate, the most critical issue for the authorities is to implement a wider, holistic tax reform. An increase in VAT now will hurt low-income Nigerians the most.
If the controversial proposal sails through in the National Assembly, VAT revenue will shoot up to N2.09 trillion in 2020, Ahmed stated. She said, “The Federal Government will be receiving proposed aggregate of N4.26 trillion from the Federation Account and the VAT pool. The states and local governments are expected to receive N3.04 trillion and N2.27 trillion respectively.” On the surface, this looks sound.
To the government, the upward VAT adjustment is enough to meet the increased personnel costs of the three tiers of government. Currently, with N18,000 as the minimum monthly wage, a majority of state governments find it difficult to pay wages and pensions so the extra funds will come in handy. Already, without the implementation of the new minimum wage, the personnel cost of the Federal Government rose from N1.7 trillion in 2017 to N2.1 trillion in 2018. So, the new rate is also essentially to cater to the new wage of N30,000, the implementation of which is being delayed by the consequential adjustments for senior civil servants.
In all this, government is emboldened by the situations in other climes. At five per cent, the authorities collected N1.1 trillion in 2018, amounting to 0.09 per cent of Gross Domestic Product compared to about 3.8 per cent in the Commonwealth and ECOWAS, a PwC report notes. The government is disingenuous when it cites higher VAT rates in other countries. A World Bank report argues that VAT potentially distorts consumer behaviour less than many forms of indirect taxes and may therefore be comparatively efficient in generating government revenues. However, they involve some drawbacks, both in terms of efficiency and equity. By law, the European Union member countries are required to levy a standard rate of at least 15 per cent, but permit a reduced rate of at least five per cent, thus enabling members to have several rates to protect the lower income earners. Cyprus has a standard rate of 19 per cent, but charges only five per cent on basic foods, medicines, books and newspapers while charging nine per cent on catering and hospitality, its mainstay. Germany, Montenegro, Malta and several other EU countries also charge far less on food and medicines. VAT is used creatively elsewhere to meet national economic goals.
But that is only half of the story. In most of these countries, social infrastructure is available and works efficiently. The tax net is inclusive and evasion and leakages are punished maximally. Here too, 23.9 per cent or over 20 million of the working population is jobless, inflation at 11.37 per cent by first quarter 2019 and GDP grew a disappointing 1.9 per cent in 2018, while foreign transactions on the Nigerian Stock Exchange dropped by N106.31 billion and domestic transactions dropped by 71.16 per cent.
At a time like this, revamping the economy and creating jobs should be the primary goal; government should avoid policies that will translate into higher cost of living, higher costs for business or more factory closures and job losses as enunciated by the distraught private sector. It is a simple economic principle that keeping more money in people’s pockets is one sure way to get the economy back on track and reduce poverty.
Nigeria is already the poverty capital of the world and the current figure of 94.35 million extremely poor could rise. An increase will invariably raise the inflation rate as VAT, a tax on all goods and services in the country, including imports, will hit the most vulnerable in a country that is import-dependent, even for food.
The cynical resort to across-the-board tax increase to meet the increased wages of less than two per cent of the population is defeatist. Generally, poorer households spend a larger proportion of their income. A VAT is therefore regressive if it is measured relative to current income and if it is introduced without other policy adjustments. The government’s argument that it will make more money available to the states, who take 85 per cent of it, is also puerile as it imposes an unfair burden on Lagos that contributes 55 per cent of VAT, the FCT 20 per cent, while the remaining 35 states generate only 25 per cent.
To be sure, VAT rate, after 25 years, ought to be reviewed in line with current realities and national aspirations; It can be raised for some goods and services, lowered for others or the increase could be graduated over a period. The trouble with our public finance is mostly one of excessive spending, not inadequate VAT. Corruption and waste define governance here. Wealthy Nigerians hardly pay tax. No serious government should feel comfortable in a situation where only 14 million of the 69 million taxable Nigerians file their tax returns annually. It is unimaginable that only 214 Nigerians paid up to N20 million or more as tax in Africa’s largest economy, according to the Vice-President, Yemi Osinbajo. The government should summon the political will to ensure that the well-heeled who are currently not captured in the tax net are brought in. In functioning countries, government takes serious exception to tax evasion, for which reason the offenders are seriously punished.
National Assembly members are set to buy cars with public funds; the government has refused to cut cost of governance or let go of loss-making state-owned enterprises, open up railway, airports, and the seaports sectors and sell the extremely superfluous Ajaokuta Steel Company Limited. The government should also ensure that it runs a trim and nimble government so that the cost of governance will be drastically reduced.
The government has to make sure that VAT is graduated, such that the burden will not be disproportionately borne by the low income earners. For instance, the right thing to do is to make sure that the additional VAT is placed on ostentatious goods, such as luxury cars, jewellery, expensive watches, exotic household furniture, private jets and yachts, among other items. Those other goods such as food, medicines and educational materials should attract less VAT, so that the low income earners will not be completely shut out.
Fiscal approaches that target entitlement reform and spending cuts will succeed rather than a general VAT hike. Raising VAT on the luxury and ostentatious goods, widening and deepening the tax net is, therefore, the way to go.