Having dug itself into a fiscal hole, the Federal Government is preparing to make Nigeria’s public finances even messier. To meet its obligations in the impending new wage bill negotiated with labour unions, Budget and National Planning Minister, Udoma Udo Udoma, said changes were being mulled in the Value Added Tax rate, among others, “to fund the (new) minimum wage once it is announced.” This is counter-productive, unimaginative and ultimately bound to hurt business and the fragile economic recovery process.
Nigeria needs today above all else, economic managers that understand the demands and dynamics of policies that will promote free enterprise, investment, job creation and efficient fiscal management best practices. Sadly, this has been signally lacking in President Muhammadu Buhari’s government and its predecessors. In times of adversity, visionary leadership thinks outside the box. The proposal to raise the five per cent VAT rate across the board is anything but visionary. Inflation could rise, job losses worsened and pressure on pay and pensions increased. As a result, millions more people may be pushed into extreme poverty. Udo Udoma and the Chairman of the Federal Inland Revenue Service, Babatunde Fowler, briefing the Senate Committee on Finance, both hinted at changes in the VAT rate “and other things.” Fowler was quoted as saying that the increase could come by this year end. Although he has since issued a rebuttal, claiming he was misquoted, he nevertheless canvassed a review of the VAT rate.
Reviewing the VAT rate is in itself not a bad idea, especially as the five per cent rate has been maintained since its introduction about 25 years ago. The motive and the timing are however reprehensible. There is no justification whatsoever to raise the sales tax on all goods and services to be paid by all for the purpose of raising the salaries of less than two per cent of the population. Nigerians are poor, denied the benefits of their natural material endowments precisely because of a distorted governance template that impoverishes the many and directs resources to only a few. Already, civil servants, elected and appointed officials absorb a disproportionate slice of all federal, state and local government expenditure. In the 2018 national budget, for instance, over N2.9 trillion out of the total outlay of N9.1 trillion was earmarked for personnel costs. The N8.82 trillion budget proposals for 2019 being considered by the parliament set aside N3.4 trillion for these purposes.
The timing is altogether wrong; when the economy slows or contracts, intelligent governments adopt measures to stimulate productive activities, boost consumer demand and create jobs. A favourite time-tested one is to offer corporate bodies and investors tax breaks to free resources for investment and new hires. A sweeping VAT rate increase will achieve the opposite as Nigeria’s productive sectors are currently beset by low consumer demand, factory closures, exchange rate instability, high energy and inputs costs, gridlock at the ports and capital flight. Of the 272 firms reported by the Manufacturers Association of Nigeria to have shut down in the 12 months to August 2016, 222 of them were small businesses that dropped over 180,000 jobs. The National Bureau of Statistics put the number of jobless at 20.9 million by December 2018 as unemployment spiked to 23.1 per cent.
A thinking government would first, have linked salary increases to productivity, right-sizing and realistic revenue expectations. Singapore, reputed to have one of the world’s best public services, has in-built pay increases and in 2017, added $15-20 to the monthly pay of lower level civil servants in response to first quarter GDP growth of 2.7 per cent and expected 3 per cent growth by year end.
Instead of a general VAT increase that will be passed on to consumers, further reduce spending power and provoke more job losses, the government should first implement liberalising policies at the ports and fine-tune existing ones. It should ramp up new tax incentives and devote considerable energy to promoting SMEs and start-ups. Considered the backbone of its economy and comprising over 90 per cent of its 65 per cent workforce, Malaysia has a procurement policy compelling patronage of its products and services.
More importantly, the measure is cynical and doubly discriminatory. Fowler has repeatedly highlighted how wealthy individuals and corporate entities evade taxes. Kemi Adeosun, the immediate past minister of finance, lamented in 2017 that only 14 million of the 70 million taxable adults paid tax and that 800,000 firms had never paid tax; while Lagos State admitted that, of its eight million taxable adults, less than 600,000 paid income tax. That is not all; oil companies are said to owe Nigeria over $43 billion as confirmed by a Supreme Court judgement, while NEITI, the extractive industry watchdog, every year publishes details of revenue leakages running into billions of dollars, and corruption at the Nigeria Customs Service continues to deprive the three tiers of government their much needed revenue. It is cynical to cite the higher VAT rates in other jurisdictions to beguile the unwary. Singapore’s sales tax rate of 7-8 per cent must be juxtaposed with its efficient, affordable public transportation, health care and utilities. South Africa’s efficient 22,000 kilometres of rail and its expanding network of subsidised bus services have no peer in Nigeria.
A more cautious approach is to introduce the increase sectorally. For instance in January, a VAT rate increase from 9 per cent to 13.5 per cent was introduced in the hospitality sectors only in Ireland. In the United Kingdom, there are three bands of VAT: zero, 5 per cent and 20 per cent. According to the BBC, many regular purchases such as food and children’s clothing are zero-rated. Domestic fuel and wind-turbine installation are 5 per cent. Other things like hot take-aways and televisions are 20 per cent.
Fowler and the other agencies should, therefore, go after tax dodgers, seal the leakages and widen the tax net by greater efficiency and the use of technology tools. The government needs the political will to compel tax compliance among everyone, especially high net worth individuals and companies. A more rational strategy should be higher taxes on ostentatious goods, especially cars and private jets. Besides, there is reported under-payment and evasion of VAT: FIRS should reform itself, while tax dodgers should face heavy fines, penalties and jail terms as a deterrent.
