Despite widespread opposition that trailed the Federal Government’s proposed increase in the Value Added Tax (VAT) and its eventual approval by the National Assembly, an expert in Monetary and Development Economics, Dr Tayo Bello, says there should be no cause for alarm over the decision.
Acording to him, the action would not likely have significant negative effect on Nigerians.
In this interview, Bello, who is a lecturer in the Department of Private and Property Law, Babcock University, also enumerated some benefits accruable from the decision and speaks on other major economic issues.
The Senate last week approved the proposed increment in Value Added Tax from 5 percent to 7.5 percent. How is that likely to impact on the country?
We need to take an in-depth look into this issue. Value Added Tax in some countries is known as Goods and Services Tax, GST. Like income tax, it is based on the increase in the value of products or services at each stage of production. Now, talking about the increase, the major benchmark for VAT is to generate sustainable revenue because of the enormous challenges the government is contending with due to decline and instability in oil price. This has greatly affected our revenue generation. The government having considered the challenges confronting it knew that if VAT was not increased, the country would face a serious financial crisis or we would continue to borrow. How do we finance the budget deficit of N2.5 trillion in a situation like this? The major option is to resort to VAT increase. We must realise that Nigeria is among countries with the lowest percentage of VAT in the world as of now. In Russia for instance where they use artificial intelligence in their revenue collection, VAT is not less than 18 per cent. In the United Kingdom (UK) it is between 17.5 to 20 per cent. In India, it is between 12.5 to 15 per cent. In Ghana it is 12.5 per cent including national health level of 2.5 per cent. In South Africa, it is 15 per cent. If you go to Kenya it is 15 per cent. In Cameroon it is 19.25 per cent, Republic of Benin, it is 18 per cent, same for Togo and Chad. The Nigerian government left the Value Added Tax the way it was because we were getting more revenue from oil. But as a result of decline in oil revenue, the government had no other option but to raise the Value Added Tax. If we leave it that way, the nation will collapse because we will only resort to borrowing, which will become a major problem to us. We cannot continue to borrow money if we don’t want both the present generation and generation unborn to continue to wallow in poverty.
Some Nigerians are worried that the hike in VAT will pile further misery on the people. Are you not concerned about that?
The increase in VAT comes with some advantages because it is based on consumption which provides a stable revenue base. You cannot feel it directly because it is not a direct tax, it is based on consumption. Secondly, it is neutral because it will be imposed on all sorts of businesses; it is not sectionalized. Also it does not discourage savings. The impact of VAT on economic growth is massive. It is an indirect taxation and contributes generally to government revenue which is used for the development of the country. It is taxed on people’s consumption, expenditure and not on their income, so you cannot feel it directly.
What do you mean when you said the impact cannot be felt directly because everyone knows that it will definitely result in increase in prices of goods and services?
It does not have significant impact on the prices of goods and services. Whether VAT is increased or not, the prices of goods and services can go up or come down, that’s normal. Let us imagine a scenario where 25 per cent is levied as VAT. The spending may increase slightly. Prices of goods rise regularly but it doesn’t affect businesses. Let us look at the United Arab Emirates. UAE introduced VAT in January, 2018 and they put it at 5 per cent. Until last year, UAE was not doing that because they relied solely on oil but with the threats facing oil business in the world – the issue of bio-fuel and renewable energy, they envisaged that there could be a problem, that’s why they introduced VAT. What we are saying is that, if you are buying a bottle of Coke for N100, it does not mean that because of the increase in VAT from 5 to 7.25 per cent there will be any significant increase in the price of the product. Of course it will be added to the cost of production but this will not be felt significantly on a single unit. Last year, the VAT generated was N1.1 trillion out of N5.3 trillion generated in that fiscal year. In that case, on the average, the VAT only contributed 12.4 per cent to our GDP. However, Nigeria is the only country in Africa where VAT contributed the lowest percentage to the GDP. In Kenya, Ivory Coast and Senegal, it contributed over 30 per cent to their GDP. So the bottom line is that the government needs additional revenue from VAT to finance the budget deficit. So, when we are looking at the disadvantages of VAT, I can tell you that the advantages far outweigh the disadvantages. I am of the opinion that we really need the Value Added Tax this time around.
Some analysts have suggested to the government to find a way of expanding tax collection as a way of shoring up its revenue rather than resort to raising VAT. Do you agree with this?
I mentioned it earlier that in Russia they use artificial intelligence in tax collection. I am aware that corruption is a major challenge in this country. Nigerians have a way of shortchanging the system. But I believe gradually we will get there but as it stands now the government needs to take more drastic steps to beef up its revenue base. Our government has been collecting tax at the detriment of sustainable economy before now. That 12.4 per cent of total revenue generated last year that came from tax was an indication that the government was improving in the area of tax collection. I will only suggest that with a systematic review and scientific package of the collection procedure, we will get there. We will need to generate sustainable revenue to be able to fill the vacuum created by the instability in the oil market. If there is no problem in the oil market, do you think the government will consider the option of increasing the VAT? It was the same reality that made UAE to explore the option of tax as a source of revenue.
You justify government’s resort to hike in VAT on decline oil revenue. But many Nigerians have maintained that the government, during the glut, failed to justify the huge revenue came to its purse. With more revenue being expected from tax now, are you not skeptical that things could still go the usual old way?
All things being equal, the way things are moving, honestly speaking, Buhari’s government has been able to sanitise the country to a certain extent. If you are a thief, you must be very careful to steal now unlike what it used to be before his coming. I am not saying everything is perfectly okay now but I can tell you that corrupt people now find it difficult to keep stolen money. That was why some of them resorted burying stolen money or keeping money inside soak away, but in spite of that some of them were caught. Things are changing gradually.
The decision by the federal government to shut down the land borders is one issue that is still generating ripples in the country. What are your thoughts on this decision?
The decision to shut down the nation’s borders is archaic and a primitive way of running the economy. It is not the right way to go. We are in a global village and what this means is that Nigeria wants to opt out of the concept of globalization. The fact that a man almost got drowned in the water does not mean he would not drink water again. You know people are neck deep in smuggling to the detriment of the nation’s economy, the best the government should have done is to tighten the security around our borders rather than outright shut down of the borders. To worsen the situation filling stations within 20km to the borders have also been shut down since Customs has said they should not be supplied with fuel. This is height of insensitivity. Take Owode in Yewa South and Idiroko for instance, does it mean that residents of these communities would not fuel their vehicles? Are they not Nigerians? It is strange that Nigeria would resort to such option at this digital age. Even our idea of policing oil pipelines is archaic. There are new technologies with which the pipelines can be secured. There are technologies that we can leverage on to secure our pipelines, immediately the pipelines are tampered with, fuel supply will stop automatically. These are things the government ought to do to safeguard our economy.