The received wisdom out there is that the proposed new rate applied for the Value Added Tax and which awaits passage by the lower legislative chambers after their counterparts’ endorsement may have negative ripple effects on the economy. But for discerning Nigerians, there is a lot to still cheer about in the economy despite the seeming challenges, reports Ibrahim Apekhade Yusuf.
Opinions are divided as to whether the new increase of 7.5% on VAT is a good idea judging by the pent up emotions being expressed in some quarters.
It may be recalled that Nigeria’s Senate on 21 November 2019 passed the Finance Bill, 2019 after the third reading just as the House of Representative is expected to kowtow.
The bill, as presented to the National Assembly in October 2019, includes measures that would revise provisions of the laws for corporate income tax, value added tax (VAT), petroleum products tax, individual income tax, and the customs and excise tax and stamp duties rules.
Passage of the bill by the upper chamber follows a public hearing on 19 November 2019. With the passage by the Senate, the next step in the legislative process is for the House of Representatives to take up and pass the bill and then it can be presented to the president for assent.
The standard VAT tax applies to all sales transactions of goods or services that are not part of the other levels.
Minister of Finance, Zainab Ahmed had said the VAT increment is aimed at expanding fiscal revenue in the country.
However, speaking with a cross-section of Nigerians, they expressed misgivings over what they described as an idea not well thought through.
In the view of Samson Makanjuola, a financial analyst, he said, the idea of the VAT was ill-timed.
“If the new rate take effect as it has been suggested after the lower house passes it, I can tell you
Taiwo Oyedele of PwC Nigeria agrees that “contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality… VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer. Any increase in VAT rate without a registration threshold and zero rating of basic consumption will increase burden on the poor and SMEs contrary to the 2017 National Tax Policy. Trying to expand the VAT net while also increasing VAT rate at the same time is a faulty tax strategy. Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring robust administration rather than by increasing rate.”
Oyedele added that “in any case, the likely increase in revenue will not be sufficient to pay the new minimum wage.”
Justification for new VAT rate
The proposal for the new minimum wage may have triggered the VAT increase. The immediate past Minister of Budget and National Planning, Udoma Udo Udoma, and the Executive Chairman of the FIRS, Babatunde Fowler, had hinted during an interactive session with the National Assembly earlier in the year when they noted that VAT rate was likely to go up to enable government fund the new minimum wage of N30,000 per month approved by the National Assembly.
Specifically, Fowler had held that the proposed payable VAT increment will be between 6.75 per cent and 7.25 per cent as against the five per cent on all products in the country. This implied an increase of between 35 per cent and 50 per cent. He added that the increment would affect the Company Income Tax and the Petroleum Profit Tax only.
This is just as the Chairman, Revenue Mobilisation Allocation and Fiscal Commission (RMFAC), Engr. Elias Mbam had in July also raised his voice above the din when he demanded for an increment in VAT from 5 per cent to about 7.5 per cent to shore up Nigeria’s revenue base which is heavily reliant on oil earnings with direct taxation, VAT and excise duties currently making up a small part.
Meanwhile, Minister of Finance, Budget and National Planning, Zainab Ahmed, has said, the Finance Bill 2019 is crucial to the growth of the Nigerian economy as it would allow the government to realize its annual revenue projections and targets.
The bill, which President Muhammadu Buhari presented to the National Assembly on October 14, has already passed the second reading at the Senate.
The minister said the Bill would provide the government with additional opportunities to incrementally improve its fiscal policy and regulatory/legal environment to further strengthen the domestic capital market, and ultimately ensure sustained and inclusive growth and development.
Addressing journalists in Abuja recently, Mrs Ahmed noted the speed and commitment of the National Assembly in considering the Finance Bill.
The President had said the Bill, pursuant to sections 58 and 59 of the Constitution of Nigeria, 1999 (as amended), will promote fiscal equity by mitigating instances of regressive taxation and reform domestic tax laws to align with global best practices.
The Bill is also expected to introduce tax incentives for investments in infrastructure and capital markets; support small businesses in line with the ongoing Ease of Doing Business Reforms; and raise revenues for the government by various fiscal measures, including a proposed increase in the rate of Value Added Tax (VAT) from 5 per cent to 7.5 per cent.
The minister said the Bill is to, among other things, amend some tax provisions; make them more responsive to the tax reform policies of the Federal Government and enhance its implementation and effectiveness
“The Bill contains vast changes to the Companies Income Tax Act, Value Added Tax (VAT) Act, Petroleum Profits Tax Act (PPTA), Personal Income Tax Act, Capital Gains Tax Act (CGTA), Customs and Excise Tariff Etc. (Consolidation) Act and Stamp Duties Act,” Mrs Ahmed said.
The amendment will help broaden the triggers for domestic taxation of income earned by non-resident companies in Nigeria through dependent agents through online market platforms.
Besides, the Finance Minister noted that the Bill will seek to address the taxation of industries, such as insurance, start-ups, and the capital markets evaluated by the government as critical to the growth and development of the Nigerian economy.
The other tax provisions to be amended by the Bill to stimulate and foster overall economic growth include the Value Added Tax Act, Cap V, LFN 2007 (as amended) to bring it in line with global best practice.
The Bill proposes to improve the efficiency of the Nigerian VAT system, taking into consideration recommendations from various stakeholder groups.
Again, the Bill will help simplify the VAT landscape, expand the VAT coverage by addressing some critical issues, such as taxation of the digital economy, VAT registration thresholds and intangibles.
The Bill will also amend the Customs and Excise Tariff etc.(Consolidation), Cap C49, Laws of the Federation of Nigeria 2004 to create a level playing field for local manufacturers.
This will subject certain imported goods to excise duties in a similar manner as their locally manufactured counterparts, while Personal Income Tax Cap P8, LFN 2007 (as amended) will be amended to provide clarity and efficiency in the administration of individual income taxes in Nigeria.
Other amendments through the Bill will be on the Capital Gains Tax Act Cap C1, LFN 2007, which also covers the taxation of business combination to prevent abuse of a provision of the Act on group restructuring.
The Bill will amend the Stamp Duties Act Cap S8, LFN 2007 to help increase revenue generation from duties on electronic stamps.
The minister said the Bill will amend the Petroleum Profit Tax to improve revenue accruable to the government by removing the tax exemptions granted for dividends or income received from companies charged under the Act.
The minister said the Bill will be passed by the National Assembly with the 2020 National Budget and the 2020 Appropriation Act.
Fallout of new VAT
According to PwC, some of the important changes that may arise from the new VAT is that know excess dividend tax to apply only to untaxed distributions other than profits specifically exempted from tax and franked investment income, just as small businesses with turnover less than N25m to be exempted from Companies Income Tax.
In its review of the proposed VAT hike, CSL Stockbrokers concluded that the plan by the federal government to finance the increment in the wage burden through tax increment would force companies to raise prices significantly, ultimately placing the incidence of the tax increment on the consumers. According to them, “in effect, we see this as a fiscal policy designed to ‘rob Peter to pay Paul’. We also expect the increase in minimum wage to be eroded by price increases of key household items, offsetting the expected improvement in purchasing power.”
It is, however, instructive to note that a number of items have since being exempted from VAT.
In a statement on its website the FIRS expressly states that, “As part of the enlightenment campaign to keep educating members of the public on their rights and obligations under the VAT Decree No 102 of 1993, the Federal Inland Revenue Service has carried out a comprehensive review of the existing List of Goods and SERVICES Exempted from VAT. The review has become necessary partly because of the problems being experienced by importers of goods at the poor as well as the urgent need to bring together all the budget pronouncements made by government as they affect VAT since the commencement of the scheme in 1994.
“For the avoidance of doubt, all collection agencies are advised to restrict themselves to this amended list of exempted items. Consequently, no request for special concession or exemption will be entertained by the FIRS henceforth. It is however envisaged that the list will continue to be subjected to periodic review in line with the existing government budget pronouncements.
In this connection, all registered persons are enjoined to display this new list conspicuously in their places of business to educate their customers. All items not included in this published list are vatable at the standard rate of 5%, except in the case of exports where the rate is 0%.”