The headlines of various newspapers on the 12th of September, 2019 were awash with news of the birth of a new ‘policy’ – the increase in the extant rate payable as Value Added Tax (“VAT”) from 5% to 7.2% by the Federal Executive Council following the directive by the President, Muhammadu Buhari, that negotiations on the consequential adjustments of the salaries of workers should be concluded by stakeholders before December, 2019. Indeed, the Federal Executive Council has stated that the increase in VAT is intended to ensure corresponding increase in payment of the minimum wage. Ignoring, for now, of this justification, the writer would clarify the entire corpus of this work before proceeding to details.
To put things in perspective, VAT is a consumption tax imposed on the supply of goods and services. What this implies is that for every commodity or service (excluding businesses transacted in the informal sector or goods and services expressly exempted by the Act) one acquires or pays for, there is some form of additional rate computed into the entire purchase price, as a value added tax. Under Nigerian Law, particularly, section 4 of the Value Added Tax Act, the rate of VAT is pegged at 5%. By way of illustration, if Chicken Republic Company sells Packaged Rice to members of the public at an original production price of N10,000, the VAT rate chargeable on that packaged Rice is 5% of 10,000 i.e N500. Therefore, Chicken Republic ought to sell the Packaged Rice to the public for N10,500. That way, the company has successfully added the required tax by law to its commodity. Chicken Republic Company would then have to remit the upped 500 Naira to the Federal Inland Revenue Service as VAT – the same happens with services rendered.
From the above illustration two major insinuations stare at us: first, that the persons who ultimately bear the burden of the VAT rate are the final consumers. So, as you consume good and services the more VAT you pay knowingly or unknowingly. Secondly, VAT is essentially a consumption tax. Interestingly, it happens that Nigeria has no many final consumers and consumption never ends, does it?
Before drawing the readers closer to fuller appreciation of this discourse, it is important to set out the following points:
- VAT cuts across all sectors of the economy. This tax is payable on all goods and services made or imported into Nigeria except those expressly exempted across all levels. So, there is an assurance of increased national revenue in view of the budget.
- Revenue from VAT is shared across the three levels of government with the federal government having only 15%, 50% for state governments and 35% to the Local Governments with 4% cost of collection to the Federal Inland Revenue Service. Indeed, it goes without saying that states contributing most to the VAT revenue (Lagos, FCT, Kaduna, Kano and Rivers contribute 87% of VAT revenue) would have the lion’s share of the revenue).
- VAT is not taxable on all kinds of commodities or services. At least, the common man has some respite. By the combined effect of section 3 and the First Schedule to the VAT Act, the following are exempted from the 5% VAT rate: Basic food items, Books and educational materials, Any products, fertilizers, locally produced agricultural medicines, all exports, medical services, plays and performances conducted by educational institutions as part of learning, services by community banks, agricultural equipment and gas utilization projects.
- Compared to other countries, Nigeria has the lowest VAT rate in the world. Ghana has a VAT rate of 15%, Egypt, 14%, South Africa, 14% which rates are higher in the UK and other developed countries. One may now wonder, why the fuss about the purposed increase in the VAT rate of Nigeria? As shall be revealed below, our purposed increase is inconsistent with current economic realities. Indeed, what these countries do is to employ various thresholds for the benefit and even continued sustainability of Small and Medium Enterprises and that way, the VAT payable does not become significantly lopsided in benefits against the lower class. The centre of this paper is the purpose the newly increased VAT rate is intended to serve – to enhance Nigeria’s revenue streams consequently making it possible to pay the minimum wage. Logically, this means that the government is likely to be impoverishing a colossal number of Nigerians while paying, as some sort of patronising well-meaning pity, a fraction of the revenue generated by the impoverished, to some employees as the minimum wage. For many, the plan is disingenuous as it not only ignores but fails to recognise that the VAT rate is a consumption tax that all classes of the masses pay unwittingly whereas the minimum wage is not enjoyed by all Nigerians. For instance, a self employed, small scale business man pays VAT just as much as anyone else without being direct beneficiaries of any form of minimum wage threshold. The purpose is disproportionately disadvantageous to many Nigerians, it is blinded to the essence of the social contract and imposes an unjustified paradox; foisting financial burdens on people with a view to relieving them by paying increased minimum wages. Having established the above, it is important to state that the FEC – approved increase in the VAT rate from 5% to 7.2% is, for now, a serpent in the egg. Because the rate is statutorily provided for in section 4 of the VAT Act, it would require legislative review and amendment to alter the rate in order to properly legitimise the increase and condense unanimity of the council into law. But the publication on the 12th of September, 2019 leaves little room for conjectures as to the likely take of the National Assembly when it is presented with question of upward review. Beset by current debts, deficits and monetary liabilities, the Nigerian government through the National Assembly would most likely accede to the increase as a way of improving the revenue streams and, as already pontificated, to facilitate the time-long agitations to pay increased minimum wages. Perilous times would call for desperate measures but this writer believes that it is incumbent on the National Assembly to defeat the pretensions in the economic prognostications by stakeholders who deem the increment in VAT as the key to sustainability and economic growth.
Here are a few points that the National Assembly must consider before it pats the council’s leanings on the back as the cure-all to a chequered economy:
- Nigerians are predominantly poor. Many Nigerians are extremely poor. In fact, the World Poverty Clock data reveals that 46.7 percent of Nigerians (That’s 86.9 Million Nigerians) are living in extreme poverty. The highest in the world! With a population of roughly 200 million, we have managed to secure a pride of place as the country with the highest rate of extreme poverty over India, the most populated country in the world, with an approximate population of one billion persons which ordinarily should have such awful statistics. As reported by the Director of Research and International Relations at the Nigerian Deposit Insurance Corporation, Nigerians who have up to 540,000 Naira in their accounts ($ 1500) are just two percent of the entire Nigerians operating bank accounts. It doesn’t end there. Statistics show that 90 percent of the monies in Nigerian Banks are owned by just two percent of Nigerians. This means therefore that about 98% of Nigerians collectively do not have as much money as a select crop of two percent Nigerians – a major indicator of the gulf between the rich and the poor in Nigeria, a major threat to socio-economic development in Nigeria. Here’s what follows: Tax accounting projections show that the Federal Executive Council – approved rate increase, if endorsed, will increase the cost of living in Nigeria by a minimum of 44% in the first instance and a subsequent progression to about 47.5% to 50% increase in the cost of living. This is because the price of goods would increase stupendously to account for the cost of the new VAT rate which will ultimately be borne by the final consumers of the goods and services supplied. So, in essence, the miniature two percent of Nigerians who comfortably live above 500,000 Naira in their accounts are pretty unperturbed by the increased rate whereas, the colossal 98% of Nigerians who do not control up to 90% of monies in banks including the 46.7% of Nigerians living in extreme poverty will be met with the inability to cater to basic needs, and further impoverished by the increase.
- With regard to imported goods and services, the price increase will exceed the estimated tax accounting projections above as suppliers of good and services will make provisions for differentials in delivery and production costs. This is only natural. And, who eventually bears this natural consequence of increase VAT rate wit respect to imported good and services?
- For tax jurisdictions such as Lagos State, the increase will impact her citizenry much more than any other state. first, Lagos operates an existing 5% sales tax under the Lagos State Tax Law in addition to the existing 5% VAT rate which means that Lagosians ordinarily pay 10% as tax on goods and services. Unavoidably therefore, the cost of living is very likely to increase astronomically by a minimum of 88% in the first instance and a subsequent progression to about 95% to 100% increase in the cost of living. This is because immediately the National Assembly approves the new VAT rate increase to 7.2% it is likely to trigger a consequential increase of the Lagos state tax law on commodities and services as a whole to 12.2% (since there is an existing sales tax of 5%). Definitely, being a consumption tax, the financial burden is borne ultimately by the final consumers. Lagos originally contributes most to Nigeria’s Gross Domestic Product – a total of 136, billion US Dollars. Economic activities are on the high in Lagos and so it is easy to see that the state which doubles as the highest contributor to the Nigerian GDP and the most populated Nigerian State will have so many Nigerians to present as lambs to the slaughterhouse of the nightmarish policy of VAT increase.
- There is the very high possibility of increase in the outflow of capital from Nigeria to other countries, brain drain as more employable youth will likely leave the country for good and in search of greener pastures, the degeneration into larger percentages of unemployment, the possible flight of financial assets, investments and commercial activities by economic players who, in a bid to attract increased returns on their investments will shift their economic activities from Nigeria to international tax havens – where the economies are more stable and clement to absorb the impact of Value Added tax by provision of correspondingly balancing economic incentives.
- The National Assembly should lastly put into consideration that the desire of the government to expand the tax net conflicts with the strategy of increasing the VAT rate. More and more tax evasion cases will be engendered and without a VAT registration benchmark and zero rating of basic consumption, the only result is amplified suffering and no more.
Clearly as stated above, Nigeria is one of the countries with the lowest VAT rate amongst other giants. The grouse that this proposed increase therefore evokes stems from the sheer inconsistency of the increase with the economic realities in Nigeria. The jubilation of equating the comparative disparities of VAT rates in other climes, (if that is anything to jubilate about) is stunted by the perennial suffering that its existence promises. It is taken for granted that the increase would no doubt boost the nation’s revenue streams and consequently empower the government to meet up with its promise to disburse fatter minimum wage rates even though statistics clearly show that the increase notwithstanding, it will not be enough to pay the minimum wage. This writer submits that some other measures can be explored to achieve the same end.
- It is suggested that a reform the law is necessary. The net of persons paying taxes should be expanded to capture those in the informal sector – The sector of the economy better explained as the sum total of income generating activities outside of a government regulated contractual relationship of production. That is, economic activities relating to production of tangible goods such as agricultural production, small scale manufacturing, building & construction, furniture & garment making, wielding etc. This sector is usually difficult to tax because its sheer size makes it difficult to ascertain the actual market and its product with no accurate statistics or bookkeeping. However, a robust administration of the sector can be achieved by classifying the members of the informal sector in laws and regulations and also by delineating some businesses into the formal sector making taxing pretty much straightforward.
- There should include a review of VAT waivers, better policing of the border to improve import VAT collection, framework for VAT on imported services and digital economy.
- As an alternative route to stashing up the revenue streams, VAT being essentially a consumption tax, should be levied on ostentatious goods. The increase should be restricted to such luxury items. This way, the bulk of Nigerians with limited funding will not be affected. This works better than allowing all and sundry to dance to the tune of the insensitive increase.
It is hoped therefore that with the realisation of how debilitating this policy could be in Nigeria, the relevant stakeholders should make adequate representation to show and convince the National Assembly that approval of the FEC – approved VAT rate will enjoy nothing but untold misery to most of whom are already immiserated.
Destiny Osayi Ogedegbe (Mr. Possible) is Nigerian Law School programme. He is a passionate advocate and public speaker with core interests in Disputes Resolution, Corporate/ Commercials and Entertainment Law. He can be reached at: 08075149946; firstname.lastname@example.org