Economic Confidential, November 2008

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Excise Duty and VAT Increase: Driving SMEs Underground

By Les Leba

0805 220 1997

The collapse of crude oil prices from an all time high of almost $150/barrel to about $60/barrel in the last three months has jolted the major beneficiaries of our bloated export revenue.  We, of course, do not include the 80% or over 100 million Nigerians who manage to find sleep every night in spite of empty stomachs in the class of major beneficiaries of our oil revenue.  In reality, these hapless Nigerians are victims of the deliberate mismanagement of our economy by the political class and insensitive and parasitic public servants.  In deed, the object of these ‘eminent’ Nigerians has never been the enhancement of public welfare, but rather political and career positioning for unfettered access to our common treasury.  This primitive motivation cuts across the strata of the management of local, state and federal government. 

The lopsided dichotomy between the huge allocations set aside for monthly payments of salaries, rents, refreshments, travel, vehicle maintenance and purchase and other recurrent expenses ensure that often less than 30% of all revenue is dedicated to social welfare and infrastructural development.  Tragically, the already paltry vote for capital expenses is further depleted by up to 50% by inflated invoices and poor execution of public projects!  If there is any evidence required to support this observation, our abysmally low rankings in the world’s poverty ratings in spite of increasing revenue and favourable cycles of oil boom in the last thirty years may suffice!

The above anomaly maybe tolerated if the huge resources set aside for recurrent expenses also provided income directly to a sizeable proportion of our population of about 140 million Nigerians!  Regrettably, it is estimated that possibly less than 100,000 Nigerians spend over 70% of public revenue!  When we also recognize the huge component of public revenue dedicated to the comfort of our ‘political royalties’ who serve in the Executive and the Legislatures of all tiers of government, we may safely conclude that possibly less than 20,000 Nigerians may actually be consuming over 50% of all public revenue!

This generous bounty has instigated a do or die mentality for those with the ambition to force their way into and remain eternally in this favoured class!  In spite of the reality that as things currently stand, less than six states out of the 36 are actually commercially viable, the ongoing and never-ending agitation for more states and local governments is evidence of this motivation.

There is little doubt that agitation for additional states or local governments creation will die a natural death once the criteria for creation implies nil funding from the oil resources of the Niger Delta and the significant VAT and corporate tax contributions from Lagos State!

As we can imagine, our beneficent oil export earnings in recent years have expanded the appetite and the stomachs of the 0.01% of favoured Nigerians, who enjoy over 50% of the total fat in the land!  The prospect, therefore, that falling crude oil prices will diminish the volume of funds in the treasury of all governments and by extension the ‘thiefable’ income, has become a source of worry to the political and public office vampires, who feed on our common wealth and the gullibility of our people!  All hands amongst this ‘favoured’ class have been summoned on deck to forestall the depletion of their loot expectations for the coming year!

The already pulverized victims of corruption and mismanagement are now being marshaled to make up the shortfall that would result from revenue loss from low crude oil prices so that our fat cats do not shed too much of their socially unhealthy appetite.  The reality of a comatose industrial landscape is there for all to see.  The debilitating effect of high interest rates, hostile infrastructural support system, multiple taxes from all tiers of government, increasing raw material costs, import dumping, etc, etc, remain unaddressed, yet the emaciated undernourished industrial cow may now be finally slaughtered in an attempt to extract milk for the 0.01% favoured class to continue to flavor their tea when 80% or more of Nigerians lack clean water to drink!

All industrially successful countries recognize the prime role of Small and Medium Enterprises, particularly in the area of employment generation!  Conglomerates and multinational corporations have their roles, but SMEs generally provide employment for over 70% of a country’s working population!  A casual walk through industrial estates and urban suburbs would reveal that SMEs have gradually been pushed to the brink of extinction and the pure water industrial subsector appears to be the most visible enduring outfits!  However, even these apparently never say die sector may also sing the nunc dimities with the canons being positioned by government in its revenue drive to cushion the impact of the falling oil prices on government income.  The lack of creative depth in our monetary and economic management is exposed by the choice of increased VAT and the re-imposition of excise duty on a wide range of industrial activities.  The net effect of both taxes would be increasing production cost across the board in a climate of rising interest rates and influx of cheap imports! 

A visit to most supermarkets is a revelation of government’s hypocrisy; over 60% of goods on display are all imported; more often smuggled with the attendant loss of import duty revenue to government and an abiding threat to local industry.  The smugglers enemy action is further actively supported by our own CBN’s generous sale of almost $3bn every month to Bureau De Change throughout the country!  Now with the reintroduction of excise duty, the same custom officers whose support to smugglers continue to endanger our local industries are now being deployed to administer the final deathblow.  The SMEs who have become endangered species will now play host to custom officers who will monitor their daily production, so that they pay appropriate taxes on each unit of output! 

A release from Customs Area Controller indicates that the host companies may be required to provide and maintain suitable living accommodation, in addition to suitable office space for the resident customs officer!

Obviously, the ultimate objective of government is to raise revenue, but this appears to be a quick stroke to kill the sector that could provide alternate income to oil!  One is tempted to wonder why government’s revenue drive is not directed to the unbelievably high profit returns of banks, or indeed, the sustenance of existing import duty waivers which have brought no succor to any facet of industry.

Nigerians are confounded by the huge revenue wastages in government and the irresponsible revenue profiles required to maintain the government apparatus of the federal, 36 states and 774 local governments!  The huge emoluments and perks enjoyed by legislators and the annual ritual of new cars, estcodes, unsubstantiated constituency projects, in spite of increasing poverty in a country where the official monthly minimum wage is less than $100 is certainly inexplicable.  Impoverished Nigerians continue to be taunted with reports of large scale fraud in all facets of public administration and the ease with which capital allocations are ‘conserved’ and shared amongst key officers at the end of every year and wonder when the nightmare will end!

Save the Naira, Save Nigerians!