Whatever happens to the VAT increase, the governments at the federal, states and local governments need to eschew those four cover up tales and embrace these two sobering truths. Employing ingenious macroeconomic policies and consistent fiscal discipline is the way to make any tax regime work for the overall good of the country.
The first thing the federal government will say to you is that the current VAT rate of 5% is too low when compared with VAT rate in other countries in Africa. But they will not mention that Nigeria’s Company Income Tax (CIT) is also high compared to other African countries. A quick look at the five countries in the chart below shows that the two taxes are often complementary, such that you don’t have high CIT and high VAT at the same time. Mauritius has 15% VAT and 15% CIT, Egypt has a lower VAT of 14% and increased CIT of 22%. In this comparison, Nigeria has the lowest VAT of 5% but leads the other four countries with the highest CIT of 30%. Going by this fair comparison, if Nigeria increases VAT to 7.5%, then it must reduce CIT rate below 30% as the trend line is already indicating.
If we agree that CIT should be lowered, then the trend line above really shows that the government may be right statistically by setting the new VAT at 7.5%. But we believe government advisers also know that a decision as crucial as increasing tax rate cannot be made by mere statistical comparison between one country and the other. The social and economic realities of each country has to be considered as well.
In light of the aforesaid, the chart below shows that Nigeria has the highest annual inflation rate of 12.1% and has the lowest per capita income of $1,960, going by 2018 figures. This is totally opposite to Mauritius with the lowest annual inflation rate of 3% and highest per capita income of $12,050. Is it then fair to compare the economic realities of a poor and unstable economy as Nigeria with Mauritius or Ghana, a West African neighbour with a higher per capita income of $2,130 and a lesser inflationary pressure of 9.8%, according to World Bank 2018 figures. It is certainly not fair to impose a higher consumption tax on the average Nigerian who is poorer than her Ghanaian or South African counterpart, to mention a few.
The argument for an arbitrary international comparison of VAT rates then does not hold in forming an opinion on the VAT increase in Nigeria. This is so because VAT directly affects the comparatively poor Nigerian resident and will provoke further rise in price of goods and services.
The second thing they will say is that increased VAT will not affect food items, drugs and books that you buy. So it will not affect poor people, it will affect only the rich who buy drinks in hotels and fly on airplanes. Let’s see if this is true.
The poor people buy frozen fish from the market because they cannot afford fresh fish that the rich consume. But the cold rooms where these dead fish are kept use electricity for their freezers. Also, the Chemist store that sells drugs uses electricity, in the evenings at least. And Government charges VAT on electricity. The fish seller at the cold room and the Chemist will be forced to increase the price of the fish and medicines they sell so as to pay the extra costs of electricity. This is just one example of higher costs of production and services that will affect you everywhere you turn to buy or get a service. The truth is VAT increase will affect the poor more than the rich.
However, it is not wrong if you choose to support those who champion government’s increase of VAT from 5% to 7.5%. It is only right for you to do so if you know what you are supporting. VAT is a tax on every final user of a service or the final customer that buys a product. It is a tax that you pay everyday whether you are aware of it or not. It is a tax you pay whether you are employed or not. It is a tax your elderly relations in the village pay when they call you about their welfare, a tax your siblings pay when they send you a message on your phone. VAT is a tax you pay unknowingly when you buy a pair of bathroom slippers.
The third thing this government’s agents will say is that they are increasing VAT to get money for your state and local government to pay the new minimum wage of N30,000. The office of the Minister of Finance indicated that 85% of the VAT will be distributed to State and local governments for that purpose. It is difficult to fool anyone with this argument for the following two reasons: federal minimum wage mainly affects government workers. So, how does minimum wage increase benefit the millions of people who are not even employed in the first place or who do not work for the government, and those who are just hustling to get by.
The minimum wage increase argument is also not tenable because it means government workers will lose all their wage increase and even more to higher prices of foods and goods they purchase every day due to the new VAT regime. This 50% increase in VAT rate will also shoot up the amount spent daily on the utilities and services they use such as airtime credits, electricity, water rate, etc.
The fourth card the pro tax increase group will play is the claim that government is increasing VAT based on expert advice from home and abroad. To be fair to the economic experts, they have offered professional advice as clients to the government, not as clients to the people. They all know the move will further impoverish Nigeria’s poor masses, but it certainly provides government with badly needed revenue at this time.
2 TRUTHS THEY WILL NOT TELL YOU ABOUT THE 7.5% VAT
The first truth the government won’t admit publicly to you is that the Federal Inland Revenue Service (FIRS) has done its best but it just can’t be enough for a federal government in need of cash. The FIRS got 54% of its VAT from locally non import goods and service in the last four years.
However, 90% of that local non import VAT which was collected from the 10 leading contributing industries has been growing altogether at a negligible average rate of 0.3% over the past six years. And that little growth is because the FIRS has widened its tax net substantially to capture many firms that were either not paying tax or defaulting in any way in recent years.
FIRS collections from Transport and Haulage services, which led the VAT contributions at an average of N100 billion per year declined annually at the rate of 7%, so did the VAT from federal agencies drop consistently between 2013-2018 at 19%.
However, commercial and trading was the fastest growing industry in terms of VAT remittances within the six years. Thus, it is clear to the revenue agency that without an increase in the tax rate, the FIRS cannot meet the fantastic tax targets that a heavily indebted Federal Government requires.
The second truth the government need to admit publicly is that it wastes most of its revenue from oil royalties and taxes to maintain the wasteful and lavish lifestyle of a corrupt bureaucracy. Since oil prices have been on the decline in recent years, government’s easy revenue has declined significantly. However, its officials are still bent on the profligacy and vain lifestyles that brought the government to its knees in the first place.
Whatever happens to the VAT increase, the governments at the federal, states and local governments need to eschew those four cover up tales and embrace these two sobering truths. Employing ingenious macroeconomic policies and consistent fiscal discipline is the way to make any tax regime work for the overall good of the country.
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