THE Federal Government’s plan to increase Value Added Tax (VAT) by between 35 and 50 per cent to raise funds for the implementation of the new minimum wage is already generating controversy. Labour, organised private sector and some state governors have opposed the move. Currently, the government is charging 5 per cent VAT on all products in the country.
If the proposal is approved by the Senate, VAT will rise from the current 5 per cent to 6.75 and 7.25 per cent. We oppose the plan to hike VAT at this point in time.
The Minister of Budget and National Planning, Udoma Udo Udoma, and the Chairman of the Federal Inland Revenue Service, Mr. Babatunde Fowler, dropped the hint of the proposed VAT hike before the Senate Committee on Finance at the presentation of the 2019/2021 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP). Fowler specifically said that the plan has become inevitable in view of the new minimum wage which will increase the size of the N8.7trn 2019 budget already said to be in deficit. The FIRS boss also suggested a reduction in Company Income Tax (CIT) rate for small businesses, so as to improve compliance. The FIRS boss believes that increasing VAT is one of the areas the agency will use to meet its N8trn revenue target. While we support the new minimum wage for Nigerian workers, we do not think that the government should hike VAT in order to implement it. The explanation that VAT is being hiked to fund the new minimum wage rankles. Government should think of other ways to get money to pay the new wage.
We say this because any increase in VAT will definitely affect the prices of goods and services and even lead to inflation. For instance, the latest figures by the National Bureau of Statistics (NBS) show that the Consumer Price Index (CPI) which measures the prices of goods and services in the country, decreased to 11.31 per cent (year-on-year) in February from 11.37 per cent recorded in January, while on a month-on-month basis, the headline index decreased to 0.73 per cent by 0.01 per cent points from 0.74 per cent recorded in January. This means an average consumer is spending more of his or her income due to rising consumer prices.
If the proposed VAT hike is approved, it will adversely affect the economy. Many manufacturing companies are finding it difficult to remain afloat as a result of multiple taxes. The manufacturers are struggling to explore measures of transferring costs to consumers. Besides the inflationary spike and increase in consumer prices, the planned VAT hike will likely reduce profit margins for businesses.
We suggest that government should drop the idea of raising the VAT and look for other means to generate more revenues for the new minimum wage and other expenditure plans. One of such avenues is a review of the present Revenue Sharing Formula (RSF) in such a manner that will give the state governments enough financial power to implement the new minimum wage. If the government goes ahead with the proposed VAT increase in order to pay workers the new minimum wage, it will make nonsense of the new wage. The VAT hike will inflict untold hardship on the people. We enjoin federal and state governments to cut down the cost of governance and be more prudent with resources at their disposal. Without mincing words, Nigeria has the potentials for rapid economic transformation and better life for its citizens only if the government can formulate policies that will promote fiscal discipline.
However, we hope that the committee set up to look into ways of increasing revenue to fund the new minimum wage should work expeditiously on this matter so that the controversy over hike in VAT is laid to rest. Government can go ahead and forward its request to the National Assembly to reflect adjustment in the 2019 budget without a hike on VAT as a precondition.
We reiterate that the federal and state governments should be able to implement the new minimum wage if they can embrace fiscal prudence, cut down security vote and unnecessary expenditure.