Funmilayo Odude, Legal Practitioner, Damod Law Practice
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Nigeria needs tax reform not VAT increase 13 May 2019
From left: Executive Chairman, Federal Inland Revenue Service, Babatunde Fowler; Minister of Finance,
Nigeria’s total public debt rose to N24.38 trillion at the end of 2018. But the government has rebuffed concerns by the International Monetary Fund (IMF) about Nigeria’s ability to meet its debt obligations. Minister of Budget and National Planning, Udoma Udo Udoma, and Minister of Finance, Zainab Ahmed, are the two government officials who have strongly defended Nigeria’s debt sustainability.
Both ministers, however, conceded that the government’s fiscal challenge lies in its huge revenue shortfalls. During the first term of the Muhammadu Buhari administration, the government introduced its economic programme known as the Economic Recovery and Growth Plan (ERGP) as well as the Fiscal Sustainability Plan (FSP), which is a fiscal framework for optimal management of public funds, reduction in cost of governance and the maximisation of revenues at the subnational level. A major part of these plans involves revenue generation through various means, including borrowing, widening the tax base and privatizing selected public assets.
As part of the government’s Strategic Revenue Growth Initiative, Zainab Ahmed, recently re-introduced the plan to increase consumption tax on luxury items, a policy that was mulled over for a while by her predecessor, Kemi Adeosun. Admitting that it would require legislative action, the minister stated that the revenue increase should be expected towards the end of the year.
Udo Udoma and Babatunde Fowler, Executive Chairman of the Federal Inland Revenue Service (FIRS), said the government was considering an increase in Value Added Tax (VAT) by as much as 50% to enable it fund the new minimum wage of N30,000. Although the government later said its goal is to increase compliance and not the tax rate, an upward review of VAT rate is expected to take place by the end of this year, nonetheless.
While government would be able to generate additional revenue, an increase in VAT rate from 5% to 7.5% would lead to an increase in cost of goods and services, given that VAT is a consumption tax that is borne by the final consumers of goods and services. The potential upshots of higher inflation and higher interest rate would worsen the current economic difficulties in the country and further weaken the purchasing power of the average Nigerian.
Thus, the goal to increase VAT collection to enable the government to fund the new minimum wage would become self-defeating. The increase in the cost of living as an unintended consequence of VAT rate hike would erode any potential benefit the new minimum wage could have brought to working class Nigerians.
While many have postulated that the current VAT rate of 5% in Nigeria is too low, compared to many other countries we ought to first tackle the low tax-compliance by reforming the tax system and improving the business environment before considering an increase in VAT rate.
Indeed, without increasing the VAT rate, revenue generated from VAT has recently been on the upswing. According to the National Bureau of Statistics (NBS), the country's VAT revenue increased by 17.28% year-on-year to reach N1.108 trillion in 2018. This lends credence to the argument that an expansion of the tax base ought to be a more crucial matter for policymakers than increasing the tax burden on those who are already paying one form of tax or the other.
Moreover, in a country where three of the most important public services – security, health and education – are marked by inefficiencies, citizens consider it a burden to pay taxes after having to pay a premium to private entities to get these basic services.
Taxation is also a tool of social engineering used to redistribute wealth in a manner that reduces poverty and inequality. Nigeria’s wealth is often redistributed by graft, which further entrenches the gap between the rich and the poor. Therefore, before the government considers rate increment of any form of tax, it has the social responsibility of determining the measurable social benefits derivable from paying taxes. It also has to address the unfair tax collection systems that allow established corporations to avoid tax, while micro, small and medium scale enterprises (MSMEs) are subjected to multiple taxes. Until the citizens begin to derive tangible benefits from the government, an increase in tax rate would be met with stiff opposition.
The National Tax Policy (NTP), approved on 1st of February, 2017, identifies some key challenges facing taxation in Nigeria. These challenges include fragmented database of tax-payers; lack of robust framework for the taxation of the informal sector; lack of clarity on taxation powers of each level of government and encroachment on the powers of one level of government by another; insufficient information available to taxpayers on tax compliance requirements, thus creating uncertainty and non-compliance; insufficient capacity, which has led to the delegation of powers of revenue officials to third parties, thereby creating complications in the tax system.
Another challenge identified by the tax policy is the use of aggressive and unorthodox methods for tax collection and non-regular review of tax legislation. This has led to obsolete laws that do not reflect current economic realities. A successful resolution of these challenges would undoubtedly affect tax compliance positively and expand the tax-payer base, leading to more revenue from taxation.
According to Fowler, the Federal Ministry of Finance’s tax amnesty programme – Voluntary Asset and Income Declaration Scheme (VAIDS) – which ended in June 2018, expanded the tax-payer base from less than 14 million to above 19 million. He also stated that N30 billion in tax arrears were paid voluntarily as a result of the VAIDS, which is one of the programmes in the NTP. The government is likely to replicate similar successes if the tax processes and systems are made more transparent and efficient.
The government can also increase its tax revenue by reviewing some of its tax incentives and waivers. Nigeria, like most developing countries, experiences huge revenue losses from tax incentives and waivers given to attract foreign investment and other capital brought into the country by transnational corporations. The National Tax Policy stipulates that revenue forgone from tax incentives or concessions should be quantified against expected benefits and reported annually. Where the benefits cannot be quantified, qualitative factors must be considered.
Tax incentives and waivers must be transparent and periodically reviewed with an assessment of the expected benefits to Nigeria. This is especially important to avoid the notion that our tax regime is friendlier to foreign investors than local businesses.
Increasing VAT rate under the current economic climate would have a regressive effect. Hence, the government should look at other means of generating revenue without relying on increasing consumption taxes. Governments at all levels should demonstrate a more prudent and responsible use of public resources in ways that benefit the people before reviewing the tax rate. State governments currently receive the highest share of VAT collection – 50%. The Federal Government gets 15%, while local governments share 35%. Yet a number of states owe a backlog of salaries and pensions while officials of the state governments are paid outrageously huge salaries, allowances and other benefits.
Thus, instead of presenting a bill to increase the VAT rate, there ought to be concerted efforts to fix the challenges already highlighted in the National Tax Policy. Areas of vital importance are the unification of the payment of tax to one agency of government at each level and the removal of some of the excessive enforcement powers of tax agencies.