The Federal Government announced last week that it would soon send a request to the National Assembly to adjust the 2019 budget estimates in order to source for more funds to pay the new national minimum wage which was recently approved by the National Assembly.
Minister of Budget and National Planning Udoma Udo Udoma, who spoke during an engagement with the Senate Committee on Finance on the Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), said government would constitute a panel that would come up with ways of increasing revenue to meet up with the new minimum wage. He said the current budget size of N8.83 trillion may increase due to adjustments to take care of the new minimum wage.
Udoma said, “The N18,000 [current minimum wage] is really too low. And it is difficult for people to manage on N18,000. So the President supported a revision, but it is important that as we are revising, we make sure that it can be funded. That is why we set up the Bismark Rewane Technical Committee. So we will be coming to you (National Assembly). There may be some changes maybe in VAT and other things. But we will be coming to you in order to make sure that we can fund the minimum wage.”
An indication as to how much VAT will increase was given at the same session by Babatunde Fowler, chairman of the Federal Inland Revenue Service (FIRS). He said VAT could increase from the current five percent to between 6.75 percent and 7.25 percent. This, Fowler said, is in order to meet FIRS’ 2019 revenue target of N8trn. He said, “By the end of this year, we should be ready for increase in VAT. A lot of Nigerians travel to Ghana and other West African countries and they can see that theirs is much higher. And they pay when they go for those trips. We should be ready for an increase on VAT.” Fowler also said “There certainly will be an increase in Company Income Tax (CIT) and also on Petroleum Profit Tax (PPT).” Neither the need to meet FIRS’ revenue target nor the alleged VAT rate in other West African countries is a good reason to hike VAT.
A three-pronged tax increase, such as Fowler outlined, in order to pay the new minimum wage is a case of robbing Peter to pay Paul. In fact, it is worse than that because while only civil servants and Organised Private Sector workers will enjoy the new minimum wage, everyone who buys any product or service in Nigeria pays VAT. Since its introduction in Nigeria in the 1980s, VAT has greatly augmented the public purse and has been an administrative improvement over previous regimes such as poll tax, jangali and excise duty. Yet, it must be kept at a reasonable level in order for this success to continue. If it is jerked up to intolerable levels, evasion especially by small companies will increase.
Even now, there are thousands of firms in Nigeria that deduct VAT on purchases and services but do not remit it to FIRS. The first challenge is to collect these unremitted VATs. FIRS should go for that, instead of increasing the VAT rate. When this was done in the dying days of the Obasanjo regime in 2007, public resistance forced President Umaru Yar’adua to roll it back because producers and service providers will transfer the burden to already over-burdened Nigerians. It might also make a nonsense of the new minimum wage because workers would lose with the left hand what they gained with the right hand.