As implementation of the Value Added Tax (VAT) as spelt out in the Finance Act began yesterday, February 1, economic analysts have been raising concerns over inflation and price hikes of products and services across many sectors of the economy.
A new VAT rate of 7.5 percent became effective with the signing of the Finance Act by President Muhammadu Buhari on Monday. It was raised by 2.5 percent from 5 percent previously charged.
Among other benefits, the Federal Government said the law would consolidate efforts already made in creating the enabling environment for improved private sector participation and contribution to the economy.
Some economists, in response to Sunday Vanguard enquiries, however, punctured government’s claim. Mr. Femi Awoyemi, Chief Executive Officer of Proshare Nigeria Limited, criticized the aspect of people being asked to produce their Tax Identification Number (TIN) before they could open bank accounts, saying it would not help the Central Bank of Nigeria, CBN’s financial inclusion efforts in the banking sector.
According to Awoyemi, TIN should not have a relationship with the Know Your Customer of the bank to enable people to open new bank accounts. “It will be making it difficult for those who were being encouraged to open bank accounts to do so.
Those people will not open bank account, what they will do is go to the fintech and open one small account,” he said.
To Dr. Muda Yusuf, the Director-General of the Lagos Chamber of Commerce and Industry, LCCI, “The increase in VAT from 5 percent to 7.5 percent amounts to additional burden on investors. “Already businesses have been grappling with multiple taxation, high import duty, high regulatory charges, exclusion from the official forex market and high energy cost.
“It is also disturbing that in Nigeria, VAT is not treated as consumption tax. Most often it is imposed on the entire value chain of production and investment. This is the reason investors will worry about the review.”
The LCCI boss urged government to scale up its commitment to the creation of an enabling environment for investment, adding: “This should be from the perspective of policy, regulatory and macroeconomic environment.”
Dr. Obadiah Mailafia, a former Deputy Governor of the CBN said the new Act has the potential to kill businesses that are trying to survive because at a time of very slow economic recovery, it is risky to actually increase taxes.
Rather than increase taxes, Mailafia advised the Buhari administration to widen the tax base by bringing people who are outside the tax net.
The former CBN chief commended Buhari for his assent to the Finance Act, complementarily to Budget 2020, noting that the move is a welcome development that it is good for the country.
“It is very welcome in principle because normally when you pass a budget, there should be a package of fiscal measures that should accompany such a budget. That is the standard practice.
In fact, it used to be the standard practice in Nigeria until during the fourth Republic we forgot about it. So I think it is welcome, it is very good,” he stated.
Experts and operators in the aviation and automobile sectors also knocked the Act, saying air travellers and buyers of vehicles should be prepared to pay more for airfares and automobiles respectively.
Tayo Ojuri, Managing Partner, Aglow Aviation Support Services, said the increase in VAT would impact airfares. Ojuri said that even if airlines decided not to increase prices of flight tickets, there would be pressure from other support services to be affected by the VAT increase.
According to him, “Prices will be impacted because we are looking at 7.5 percent of base fare. Even if it is five percent, it will still have impact. Aviation has a value chain that will pass costs to the airlines.
The service providers will pass on the charge to the airlines and the airlines will pass it on to the passengers.”
Also, Kunle Jaiyesimi, Deputy Managing Director, CFAO Motors, said auto assemblers and vehicle dealers could not absorb the increase in the VAT rate would have to pass it on to the customers.
“Prices of vehicles have to go up. Already we have about 250 units (vehicles) at the port awaiting clearance. We just hope the Customs platform has not been changed because we had orders for those vehicles, when prices were fixed at five percent VAT rate.”
Equally, Remi Olaofe, Executive Director of the Nigerian Automotive Manufacturers Association, said the finance law would encourage “new entrants into the auto business and ensure government’s support for small-scale businesses to grow.”
However, Taiwo Oyedele, Tax Leader at PricewaterhouseCoopers PwC said the new VAT regime will have the biggest impact on the Nigerian tax environment this year 2020, with medium-small and micro-enterprises MSMEs, the biggest winners.
On its website, Proshare Nigeria, a leading economic and financial data resource company, said it is imperative that the Nigerian tax legislation is updated frequently to respond to the challenges of today’s business environment, which therefore underscores the importance of the Finance Act 2020.
It contains several long-awaited changes to the tax framework, which seek to address issues of low tax revenue growth, such as an increase in the VAT rate to 7.5% and the introduction of tighter deductibility rules.
Finance, Budget, and National Planning Minister Zainab Ahmed explained that the Act has taken care of essential palliatives to support MSMEs and mitigate the impact of the Value Added Tax (VAT) rate increase on the most vulnerable businesses, communities and citizens in the economy.
Few days after, government released a list of about 20 basic household items added to the exemption list of goods and services on the VAT under the Finance Act.
Government maintained that Nigeria’s increased new VAT rate of 7.5 percent was still the lowest in Africa, and one of the lowest anywhere in the world. It stated that South Africa’s VAT was 15 percent; Ghana; 12.5 percent; Kenya, 16 percent; Egypt, 14 percent; Rwanda, 18 percent; and Senegal had 18 percent. The new Act raised VAT from 5 percent to 7.5 percent.
Under Nigeria’s revenue sharing formula, 85 percent of collected VAT would go to states and local governments. With the present LG structure in the country, analysts say, the Northern section of the country is placed at an unduly advantageous position because it has by far the greater number of LGAs.
These are LGAs created based more on landmass than on human population. The country was deliberately structured that way during the military rule to give that part of the country an undue advantage when it comes to revenue distribution, not generation.
An often-cited example is that of Lagos and Kano states, which started off with the same number of LGAs at the 1967 state creation, only for Lagos to still remain at 20 LGAs while Kano, despite Jigawa State having been carved out of it, now having 44 LGAs.
Even Jigawa, the sister state, boasts of 27 LGAs, while efforts by Lagos State, which is indisputably the most populous in the country, to increase its number of LGAs have been met with resistance.
Statistics from the December 2019 Federation Accounts Allocation Committee (FAAC) showed the gross revenue available from the Value Added Tax (VAT) was N114.8 billion, out of which the Federal Government received N16 billion, the state governments received N53.4 billion, the local government councils received N37.4 billion and the revenue-generating agencies received about N8 billion as cost of revenue collection.
A national newspaper editorial once called for the redressing of this injustice in VAT sharing formula for various reasons due to the contradictions in the Nigerian federation, where states that produce the wealth that sustains the country are hardly appreciated.
Just as is the case with the country’s oil resources, the VAT figures reveal a warped system where some areas labour to produce the wealth, while others position themselves to grab the lion’s share of what is available for sharing.
Added to this brazen injustice is the inclusion of the 12 Sharia practising Northern states in the sharing of VAT on alcoholic drinks. Hisbah, the Sharia law enforcement agencies in these states, regularly confiscate and destroy alcoholic drinks.
Besides the VAT Act, the new law amended a number of other existing laws, including the Petroleum Profit Tax Act; Customs and Excise Tariff Act; Company Income Tax Act; Personal Income Tax Act; Stamp Duties Act; and the Capital Gains Tax.
The Federal Government is targeting about N2.08tn this year from the Value Added Tax revenue, according to the Medium Term Expenditure Framework. A breakdown of the N2.08tn showed that the Federal Government alone would receive about N315.47bn, representing 15 percent; states, N1.04tn, representing 50 percent; while the local government areas would get N751.43bn or 35 percent.
The Federal Government has progressively been shifting focus to non oil revenue. Oil production disruptions and price shocks have accounted largely for the unimpressive revenue return as the nation has largely depended on revenue from oil sources.
Many companies have adjusted their charges on their goods and services as from yesterday. In a statement issued by UBA, yesterday and sent to Sunday Vanguard, the foremost bank said in compliance with the directive on VAT: “All tax-deductible transactions carried out on our platforms and branches will be charged at 7. 5%.
For example, with the new rate, Electronic Funds Transfer to other banks below N5, 000 charged at N10.50 (N10 plus N0. 50 VAT) will now be charged at N10. 75 (N10 plus N0. 75 VAT).”
Feelers from the media industry too revealed that some media organisations have reviewed upwards their advert rates, while some are on the verge of adjusting theirs.