The Proposed VAT IncreaseThe Proposed VAT IncreaseThe Federal Inland Revenue Service (FIRS) has been pushing vigorously the idea of an upward review of the Value Added Tax, VAT. Like a battle that must be won, FIRS chairman, Ms Ifueko Omoigui-Okauru, has been relentless about it. For a long time, she has mustered all the forces of establishment logic at her disposal, to back up theories and presumptions that appear more rhetoric and plausible than conforming to existing economic realities. If FIRS succeeds in pushing through the idea, Nigerians will, as from January 2009, begin to pay 15 per cent VAT as against the current rate of 5 per cent — a whopping 200 per cent rise.
No doubt, the VAT has some advantages. It is a veritable instrument against tax evasion, Its wide scope has led to the employment of many Nigerians in the administration of the scheme. Above all, it has boosted the revenue profile of the three tiers of government. Replacing Sales Tax of 1986, the VAT has had its sharing formula reviewed four times since its implementation commenced January 1994 (upon promulgation of Decree 102 of 1993), to attain the existing sharing formula of 15, 50 and 35 per cent for Federal, States — FCT and Local Governments respectively.
Apparently, it is its huge revenue generating potential that makes it attractive. But FIRS has always played down on this since the idea for an upward review of VAT was mooted during the Obasanjo administration. At that time, the National Assembly rejected the proposed increase through its inclusion in the 2007 budget. It argued that government should plug existing loopholes in the collection of taxes rather than transferring the burden of its inefficiency to VAT payers.
Towards the end of Obasanjo regime, the then outgoing Finance Minister, Mrs. Nenadi Usman unilaterally reviewed the VAT rate to 10 per cent, justifying her action on the powers conferred on her by Sec. 34(a) of the VAT Act. This was eventually reversed by President Yar'Adua as one of the conditions to call off the nationwide strike embarked upon by the Nigeria Labour Congress in June 2007. Since then, the FIRS has not relented; this time its position is 15 per cent.
The reasons being canvassed by government for the VAT increase appear more extraneous. For example, it is argued that Nigeria's VAT rate of 5 per cent is the lowest in the ECOWAS region and that it constitutes a “source of distortion” to trade as well as discourages competition in the region. It is also explained as part of the Federal Government comprehensive reforms aimed at achieving a tax system that will significantly encourage investment within the Nigerian economy, leading to creating of employment opportunities, attracting foreign investors and achieving higher economic growth. Ms Omoigui-Okauru did not fail to point out that VAT increase was a conditionality to be part of the common economic endowment policy of the ECOWAS plan.
In a global economy that is driven by national interest, it beats our imagination that FIRS Chairman is vigorously pursuing a regional economic objective that should override our national interest. United Kingdom, a founding member of the European Union, has refused to submit its national currency, the Pound Sterling, to the Euro. Despite operating a healthier economy, countries like Japan, Malaysia and Singapore have VAT rates as low as 5 per cent — notwithstanding their trade relations with other economies in the same region with different VAT rates.
It should be noted that the other ECOWAS countries do not have productive capacity similar to Nigeria. Most of them depend largely on imported goods and services hence they raise their VAT to generate more revenue. Ghana appears a better managed nation with relatively stable power supply; and Gambia operates a policy that prohibits exorbitant land and real estate costs used for production purposes. Nigeria has the highest cost of doing business in the region.
It is not difficult to see that the reasons being canvassed by FIRS will not do Nigerians more good than harm. Obviously, VAT increase will trigger off a spate of inflation with its attendant consequences. For instance, the organized private sector, from reports, has lost at least 60 per cent of its members. Power generation in the country is today less than 3,000 megawatts. The high prices of diesel, gas and black oil contribute to the harsh operating environment. Road networks have virtually collapsed and insecurity is the order of the day. Inflation and lending rates are shooting for the skies, even as the people's purchasing power is daily vitiated. Saddled with the pains of multiple taxes, businesses continue to close down, creating worsening unemployment regime. The United Nations reported recently that 64 million of Nigeria's 80 million youths are unemployed.
Our position notwithstanding, we believe it has become necessary to review the VAT structure. Bearing in mind that Sales Tax which VAT replaced is on the Residual List as state tax, it is entirely out of place for VAT to be administered centrally; moreover when one considers derivation principle. Again, VAT administration should be made more efficient and its scope well covered. This is better than considering an increase at this time.
Omoigui's argument that Nigerians should focus more on what the VAT proceeds should be invested upon represents the rhetoric of our public officers. Huge annual budgets since the return to civilian rule, for instance, have not translated into high economic performance neither has it produced better living standard for Nigerians. In fact, it is suspected that too much money in the coffers of government is partly responsible for the high rate of corruption in the country. Even if the increase in VAT has become necessary, we do not believe that this is the opportune time to implement it.
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