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50 per cent increase in VAT: Matters arising

Tax, Anambra, VAT
File: VAT

By Henry Boyo

ON September 11 this year, Hajiya Zainab Ahmed, Nigeria’s Finance, Budget and National Planning Minister, briefed State House Correspondents, of government’s plan to raise the Value Added Tax rate from five per cent to 7.5 per cent, i.e. about 50 per cent increase on the existing rate.

The decision to increase VAT rate, at this time, may not be very popular, as inflation, has, oppressively remained above 10 per cent for several years, and this has predictably, gradually eroded, at least 50 per cent, of the purchasing power, of all income earners, in the last five years. Thus, the N18,000 static Minimum Wage, for example, would command, barely N9,000, in real purchasing value after five years, because of irrepressible inflation rates, and Naira devaluation.

Similarly, the new N30,000 ($98) Minimum Wage, also, has less intrinsic value than the preceding Minimum Wage of N18,000. The collateral erosion of consumer demand, caused by lower purchasing power has, invariably, also negatively impacted productive output and employment opportunities; the over 100 million Nigerians, reportedly, living in poverty readily corroborates this ugly trend.

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Consequently, a 50 per cent increase, on the existing five per cent VAT rate would, therefore, possibly, diminish, any little succour that the N30,000 new Minimum Wage, would have provided to half of Nigeria’s population, who, now live on less than $2/day.

Government revenue, reportedly expanded, significantly, when VAT was first adopted as a fiscal instrument in 1994; however, the sustenance of five per cent VAT rate, since 1999, may in fact, be partially, responsible for fueling higher consumer prices with the related double-digit inflation rates which in turn induce higher rate of interest.

In retrospect, Etubom Anthony Ani, who was Nigeria’s Foreign Affairs Minister, before he became Finance Minister, between 1994-99, reportedly, moved the motion that initiated the adoption of VAT as a fiscal tool in 1994.

The former minister who has been largely reticent, has graciously, made available, to this column, a brief explanation of the circumstances and the underlying strategy that predicated the successful adoption of VAT in 1994. Etubom Ani’s submission is captured hereafter, and will be followed by a postscript by this columnist: Please read on.

“After the savage demolition of the Kalu Idika Kalu’s 1994 budget which led to the withdrawal of the proposed budget at the Federal Executive Council Meeting of January 1, 1994 and the consequent rush of Kalu to the hospital, I moved for the motion for the government to introduce VAT in Nigeria.

At that date, I was the Minister of State for Foreign Affairs and the rate of VAT as at January 1, 1994 was five per cent and has remained so to date. I moved to the Ministry of Finance in October 1994 and I found myself in-charge of the administration of VAT laws.

“The amount of VAT collected in 1994 was N8 billion and this was big money at that time. When we reviewed our internally generated revenue profile, we found out that VAT is a consumption tax and people who consume live in the 774 Local Government Areas, LGAs, in States and five Area Councils in Abuja. We came to the conclusion that if Nigeria was to maximize the revenue from VAT, we must go by the way of horizontal expansion i.e. we must open VAT offices in all the local government areas and area councils. We projected that at five per cent rate VAT, Nigeria would earn between N2.5-N3 trillion annually if VAT offices were opened and equipped in all LGAs and Area Councils. We opened 15 offices in 1996 and 30 offices in 1997 and the VAT receipts were exponentially very high and encouraging.

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Unfortunately, the issue of VAT offices has been stopped and we are going back to vertical increase in order to achieve the same revenue of N2.5trn (we want to increase the VAT rate to 7.5 per cent). The advantage of spreading the VAT to all LGAs is that the government will have the statistics of all VATable persons in Nigeria and can then increase the rate of VAT from time to time scientifically. I do not intend to go into the politics of VAT increase but my advice to government is to go back to the drawing board and open VAT offices in all the LGAs and Area Councils. We will achieve the same result VAT revenue of over N2 trillion.

“Establishment of VAT offices would not only broaden the tax base but it would bring tax services nearer to the people and enhance voluntary compliance. It would also heighten competition amongst states for VAT collection. People have called for a review of the present formula of sharing VAT between the three tiers of government.

The establishment of VAT offices in LGAs will facilitate the scientific and more transparent formula for the determination of new reviews. It must be emphasized that an increase in VAT rate must be accompanied with a reduction of personal income tax rate. VAT is a convenient substitute for personal income tax and must be seen as such.

When VAT was introduced in 1994, we carried out a comprehensive review of personal income tax and companies’ income tax and these were reflected in budget statements of 1996. We expanded the bands of allowances for personal income tax and reduced the rates of personal income tax and companies’ tax.

The result of these measures was to reduce the burden on tax payers and remove the discontent caused by the introduction of VAT. Government may wish to consider this measure should it wish to continue with the policy of immediate increase in VAT rates.”

COLUMNIST’S POSTSCRIPT NOVEMBER 2019: The former Minister has spoken as, an elder and also a statesman, with the above intervention, which invites us to seriously take a second look at the present decision to vertically increase VAT rate, so that we may avoid social and economic outcomes which may be counter-productive.

In current practice, the tradition of higher VAT rates has become rather historical, as lower VAT rates, applied within a wider tax base have become more fashionable as a fiscal instrument, to stimulate economic growth, particularly in a challenged economy, like ours; for example, the reduction of VAT from 17 per cent to three per cent, is largely celebrated, in Ghana, as an elixir to that country’s increasing popular attraction, as a preferred destination for investments.

In contrast, Nigeria’s Government is seeking to boost revenue and possibly reduce annual fiscal deficits by further eroding purchasing power and consumer demand, with a 50 per cent increase in VAT!

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In practice, there would, arguably, be less and less tax revenue, whether Personal or Corporate to collect, if a tepid consumer market, does not sufficiently stimulate increasing production output and create more job opportunities. Nonetheless, in keeping with tradition, the receipts from higher taxes will, regrettably, still be embezzled and laundered in safe havens abroad, and ultimately leave Nigerians with the short end of the stick!

It is also equally worrisome that while the poor still inequitably endure higher multiple tax burden, the better endowed investors in Nigeria’s Stock Exchange are inexplicably presently tax exempt!

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