VAT Hike Will Kill Businesses, Shrink GDP, Experts Say
Experts and groups such as the Nigeria Employers’ Consultative Association have said the recent increase in the Value Added Tax rate from five per cent to 7.2 per cent will lead to closure of many businesses.
The Head of Tax and Corporate Advisory Services at PricewaterhouseCoopers, Taiwo Oyedele, said the new VAT rate would shrink the GDP growth and disposable income of Nigerians.
The Director-General of NECA, Mr Timothy Olawale, noted that the timing of the increase in VAT rate was wrong, stressing that the government ought to support businesses in reducing the alarming unemployment rate in the country.
Recall that the Minister of Finance, Budget and National Planning, Zainab Ahmed, on Wednesday announced the VAT rate increase at the end of the Federal Executive Council meeting.
Olawale, however, argued that the benefits of the recently signed national minimum wage of N30,000 would be neutralised by the proposed increase in the VAT, thus further reducing the purchasing power of the citizens.
“If this new VAT rate is implemented, the purchasing power of the citizens would have been reduced, sales of goods and services will reduce and inventories for business will be high and could lead to closure of businesses that ought to be supported by government in reducing unemployment rate that is currently alarming.
“Furthermore, the benefits of the recently signed national minimum wage of N30,000 would be neutralised by the proposed increase in the VAT, further reducing the purchasing power of the citizens, leading to increase in prices of goods and services. It will result in upward movement of the inflation rate, and further contraction of the economy.”
Olawale who was speaking in Abuja noted that the recently released data of the country’s Gross Domestic Product indicated a contraction in the past two quarters (Q4 2018, 2.38 per cent; Q1 2019, 2.10 per cent and Q2 2019 1.94 per cent).
Rather than increase the VAT rate at this point, he said countries should be formulating fiscal policies to stimulate their economies.
“Therefore, this suggests that at this period of time, countries should be formulating fiscal measures/policies to stimulate their economies,” he stated.
Olawale, who said that in the event that the government must increase VAT rate against the will of the people, it should have been limited to luxury or ostentatious goods.
He also urged the government to double its efforts at expanding the tax net, reduce the income gap and improve the economy through more friendly fiscal policies and promote the ease of doing business in Nigeria.
Oyedele of the PwC in a statement on Thursday said more people were likely to evade tax payment as businesses would become less competitive.
At the current rate of five per cent, the PwC partner explained that the country’s VAT collection of N1.1tn in 2018 amounted to 0.9 per cent of the GDP compared to about 3.8 per cent for commonwealth and ECOWAS countries.
While estimating that the government would earn additional N440bn annually from the two per cent increase in VAT rate, he said for Nigerian businesses, it meant a 40 per cent increase in VAT cost.
The tax expert noted that because VAT on capital expenditure was not allowed as a credit in Nigeria, the cost of real investments would go up.
On the positive side, Oyedele said, “Additional VAT revenue will help reduce budget deficits, reduce government debt and fund social services especially at sub-national level.”
To avoid the negative impact of VAT, he argued that VAT should be paid according to individuals’ ability as not everyone could afford a seven per cent VAT rate.
He suggested other palliative measures, saying “exempt or zero rate essential consumptions like foods, education and primary health care. The exemption should not be limited to only unprocessed food items. In other words, a VAT increase should not affect the price of bread.”
“Create a VAT registration threshold to eliminate VAT compliance burden for small businesses. Allow businesses to account for VAT on cash basis rather than on invoice, which creates a cash-flow problem. Lead by example; ensure that government and all MDAs fully comply by remitting VAT collected from their contractors. Ensure transparent reporting and efficient utilisation of the revenue for public services and infrastructure.”
Reacting to the proposed increase, a former Director-General, the Securities and Exchange Commission, Dr Suleyman Ndanusa, said it would affect demand for goods and services.
He said companies would suffer if people did not demand for goods and services because of VAT increase.
“If people do not demand for goods because of more tax burden, it will affect the companies that produce them. And if the companies that produce them are not making money, it will obviously affect their profitability and income,” he said.
Ndanusa, who spoke to the News Agency of Nigeria, also noted that the timing was wrong, considering the challenges in the economy.
“The timing is quite wrong. At this point in time, our economy needs to be helped by policies that will ginger more consumption and more disposable income for the masses. The paradigm for me has to change. Are we increasing tax just for the purpose of revenue or managing our fiscal policy taxation for growth? The paradigm has shifted from revenue-driven taxation to growth-driven taxation,” he said.
He added that government needed to introduce incentives, reduce interest rates and pump up consumption to help the economy to grow instead of increasing taxes.
“The approach must be holistic, obviously at a time like this when there is a seeming recession or coming out of recession. Government needs to pump up consumption; when you begin to tax expenditure just for the purpose of revenue, it will further dampen demand and affect businesses.”
But the President/Chairman of Council, Chartered Institute of Taxation of Nigeria, Gladys Simplice, described the proposed increase in VAT as a welcome development, saying she was expecting it to be increased to 7.5 per cent.
“As an institution, we have always said we should move away from direct to indirect tax. If VAT is religiously monitored for payment, we will reap a lot of money from it. Over the years, VAT in Nigeria has been the lowest in the world,” she said.
Citing the recent signing of the African Continental Free Trade Agreement, she said the VAT hike would help Nigeria to be more competitive.
“I believe we are moving in the right direction. The only thing I am yet to see is proper movement and encouragement in Companies Income Tax and Personal Income Tax. I would have expected that as we have increased VAT, the CIT should be lowered and the highest rate for personal income tax should also be lowered,” Simplice added.
A former Director- General, West African Institute of Financial and Economic Management, Prof Akpan Ekpo, said the proposed 7.2 per cent “is too high, considering the fact that the economy is just coming out of a recession.”