Vanguard Money Digest

March 2, 2020

Analysts dismiss impact of VAT on stock investment, call for reverse incentive



By Nkiruka Nnorom

Executives at the Securities and Exchange Commission, SEC, and the PriceWaterhouseCoopers, PwC, have said that reinstatement of Value Added Tax, VAT, charges on the stock market and the subsequent increase to 7.5 percent is unlikely to undermine investment in the capital market.

They said that rather than canvassing for the introduction of incentives like VAT removal, disincentives that impact the market negatively should be the focus of advocacy in the market.

Afolabi Olowookere, Head, Economic Research and Policy Management Division of the Securities and Exchange Commission (SEC), told Vanguard that the implication of the VAT inclusion may not be severe on the market.

He said that securities dealers may be willing to either forgo the VAT part of the payment or split it with the investor depending on the volume and value of transaction and agreement reached with the individual investor.

He stated that “with the new VAT regime of 7.5 percent, N1,112.30 extra cost would be paid on an average buy transaction. Similar analysis done on the sell side shows N1,085 and N1,628 for the end of exemption and a new regime, respectively.”

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Olowookere noted that five possible scenarios would apply with the new VAT regime where investors are expected to part with 7.5 percent in VAT payment.

“The first case scenario with 40 percent probability is that investors may respond by reducing transactions in less proportion than the VAT increase because brokers are willing to cut the brokerage commission, thereby sharing VAT cost.

“There is 25 percent probability that investors may respond by increasing transactions because other factors such as capital gains are favourable.

“There is also 20 percent probability that investors may respond to the VAT increase because it is insignificant and 10 percent probability that they (investors) may respond by reducing transactions in the proportion of the VAT increase, while only five percent may respond by reducing transactions at a higher proportion than the VAT increase.”

Taiwo Oyedele, Head, Tax and Corporate Advisory Services, PwC, said that the 7.5 percent VAT is very insignificant to cause any shift in investment, adding that it is unnecessary to continue to canvass for its removal.

“One thing is that we do not situate our solutions in a way that is impactful. For instance, we spend so much energy on VAT and capital gains transaction, but in my view, it is so insignificant; we should not even lobby for it because as far as government is concerned, they will say ‘we have given you one incentive’.

“For N1 million investment in the capital market, on the buy side, you pay N700 (it is now up to N1,050). On the sell side, before, we pay N1,000, now it is N1,500. No one will have N1 million to invest and decide otherwise because of N1,750.

“We should not be asking for incentives from the government; we should rather ask the government to remove disincentive,” Oyedele added.