By Nkiruka Nnorom

EQUITY investors may be parting with about N1.83 billion monthly, in commission and other fees owing to the reinstatement of Value Added Tax, VAT, charges on transactions in the stock market, as well as the proposed 2.5 per cent increase in the VAT rate.

Zainab Ahmed

The Nigerian Stock Exchange, NSE, has recorded an average monthly transaction value of N83.23 billion this year, over which equity investors are paying an estimated 2.12 per cent charges, being fees and commission on the sell-side transaction.

Domestic investors, who are irked by the development and other taxes imposed on equity investors, have, therefore, called on the National Assembly, NASS, and the Federal Government to reconsider the action and revert to status quo in order to save the market from the further crash. This year alone, the market has slumped by 13 per cent due to weak domestic investors’ participation and risk-off sentiment by foreign portfolio investors and institutional investors.

The huge downturn was moderated by the listing of two telecommunication giants, MTN Nigeria Communication Plc and Airtel Africa Plc, on the local bourse.

Prior to the reinstatement of VAT on equities, sell-side transactions attracted 2.01 per cent charges, while buy-side transaction attracted 1.71 per cent charges.

However, with the re-introduction of five per cent VAT and proposed increase by another 2.5 per cent, investors seeking to exit the market will henceforth pay 2.12 per cent of the total transaction value, while investors seeking to enter the market will now pay 1.79 per cent charges on fees and commission.

Investment analysts at EFG Hermes, an investment banking firm, said the development would exacerbate the woes of the investors who have been battling with an unrelenting bearish run.

They opined that reinstatement of VAT in the stock market and the subsequent increase in the rate is a disincentive and could reduce the competitiveness of Nigeria’s equities market.

VAT in history

Recall that following the lull in the equities market, the aftermath of the 2008/2009 global financial crisis and the need to encourage more investors’ participation, the Federal Government, in 2014, announced the suspension of VAT charges and waiver of stamp duty on transactions in the Nigerian stock market for a period of five years.

The then Minister of Finance and Coordinating Minister of the Economy, Dr Ngozi Okonjo-Iweala, set up a committee to revive activities in the Nigerian Stock Exchange (NSE).

Following the decision reached by the committee, the minister announced a waiver of stamp duties and exemption of VAT on transactions on the Exchange.

The VAT exemption applied with regard to commissions earned on the traded value of shares, commission payable to Securities and Exchange Commission, SEC, the Nigerian Stock Exchange, NSE, and the Central Securities Clearing System, CSCS.

The exemption, designed to encourage investment inflow in the market, was effective July 25, 2014.

Consequently, the exemption expired on July 24, 2019, and was not renewed by President Muhammadu Buhari. Thus, commissions earned or payable on the above-listed transactions were reinstated.

Breakdown of the fees

Prior to the reintroduction of VAT, investors executing sell order-pay 0.3 percent fees to the NSE; 0.3 percent CSCS fee; 0.06 percent CSCS trade alert and 1.35 percent brokerage commission, bringing the fees payable to 2.01 percent.

On the other hand, charges for buy order prior to VAT reinstatement include 0.3 percent SEC fee, 0.06 percent CSCS trade alert and 1.35 percent brokerage fee.

However, with re-introduction of VAT and proposed increase by 2.5 percent, charges on sell-side transaction has risen to 2.12 percent comprising of brokerage fee (1.35 per cent); stamp duty (0.075 per cent), CSCS fee (0.3 per cent), VAT on CSCS fee (0.023 per cent), CSCS trade alert (0.06), VAT on CSCS trade alert (0.0045 per cent) and NSE fee (0.3 per cent).

On the buy-side, charges apply thus: brokerage fee (1.35 per cent), stamp duty (0.075 per cent), CSCS trade alert (0.06 per cent), VAT on CSCS trade alert (0.0045) and SEC fee (0.3 per cent).

Also read: CBN backs FG’s plan to increase VAT, says Nigeria has lowest

Analyst view

Lilian Olubi, CEO, EFG Hermes Nigeria Limited, speaking on the development, said the action has added to the comparatively high costs of doing business in the Nigerian capital market and could be considered a disincentive at a time when the market needs to be more competitive in attracting and retaining investors.

She opined that while the current amount is comparatively lower than the percentage charged by some other countries, but the amount cannot be considered in isolation of additional transaction costs that characterize the Nigeria equities market and doing business in Nigeria as a whole.

The costs, according to her, are considerably higher than those of Nigeria equities market’s peers in other frontier and emerging countries and therefore pose a real threat of reducing the competitiveness of the Nigerian market.

“The market has remained bearish since the waiver was introduced, which is indicative that the macroeconomic conditions that led to its introduction are still prevalent. Furthermore, the reinstatement of VAT directly impacts the returns due to already wary investors and could lead to capital flight to more accommodating jurisdictions.

“Given that the equities market is still in a state of slow recovery following the global market crash of 2008/2009 and the 2016 recession, a concession on equities transaction costs will be a welcome development and will go a long way in bolstering investor interest. The listed companies are quite heavily regulated and they have statistically proven to be compliant taxpayers.

“A concessionary taxation regime will very likely positively impact the trading liquidity of these companies and attract more listings in the near future which will, in turn, drive the companies’ continued compliance with their tax obligations,” she said.

She declared that the timing could have been better given the impact of such an imposition on the current state of the equities market and by extension, investor confidence in the stability of our market.

According to her, “The waiver period unfortunately elapsed during a period of transition in leadership at some levels of government and this presented quite a challenge to capital market advocacy groups seeking an extension of the waiver. In addition, the end of the waiver coincided with the shift in governmental policies towards exponentially increasing internally generated revenue and a widening of the tax net. This conflict in policy considerations presents an additional setback to negotiations for an extension in the VAT waiver.”

Shareholders call on NASS, EAC to reconsider the decision

Investors, who spoke to Financial Vanguard, called on the NASS to reject the plan for further increase, saying that it would discourage investment in the market.

They also appealed to the newly constituted Economic Advisory Council, EAC, to impress it on the president to consider the VAT implications on the capital market and how it is affecting the entire economy.

“One would have expected the extension of VAT exemption after its expiration but the reverse was the case. It will automatically result in low purchasing power for equity holders, increase the cost of the transaction and reduce liquidity flow, which is an essential ingredient for a robust market.

“No increase in VAT should be approved or justified. It is important to call on NASS to reject this instantly and revert to status quo,” said Mr Patrick Ajudua, National Chairman, New Dimension Shareholders Association.

Agreeing with him, Moses Igbrude, National Publicity Secretary, Independent Shareholders Association of Nigeria, ISAN, said: “It is unfortunate that FG decided to restore VAT in every transaction on the exchange in the first place despite the current situation of the market. This has shown that those who are running the economy do not understand the importance of the capital market.

“This singular act will surely discourage investments and will affect the market negatively. The proposed 7.5 per cent VAT increments will do further damage to the market that is already in a bad shape. This will surely make investors move their funds to other climes that are more business-friendly.”

Gbadebo Olatokunbo, Shareholder Activist and co-founder, Noble Shareholders Solidarity Association, said that reinstatement of VAT is uncalled for, adding that there is need to review it in order to get more retail investors involved in the market.

He said: “In a situation where a high percentage of transactions in the equities market is carried out by foreign portfolio investors, then we really need to do everything possible to encourage more retail investors in our capital market and the imposition of taxes/VAT is not part of the encouragement. Therefore, at no time should VAT be imposed on local investors.

“Imposition of VAT on equities transactions is very wrong. Don’t forget that dividends attract withholding tax. I am of the view that what government is getting from returns on investment (dividends) should be enough taxation on equities.”

Vanguard