Implementation of 7.5 percent Value Added Tax (VAT) regime, which took effect at the weekend has elicited reactions from stakeholders and experts as they are demanding waivers, exemptions, better infrastructure and others.
They said except these demands are met, it may not be easy for some sectors of the economy to grow in the new tax regime. Instead of the easy way of raising rates, experts suggest Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring a robust administration.
This should include a review of VAT waivers, better policing of the border to improve import VAT collection, framework for VAT on imported services and digital economy.
Arguing that an increase in VAT rate now is bad timing and inconsistent with current economic reality, the stakehokders added that the likely increase in revenue will not be sufficient to pay the new minimum wage.
However, some stakeholders are demanding exclusion of investments from VAT, saying VAT was meant to be on consumption and not investments. They are of the view that if the government must encourage people to invest, they should be excluded from certain taxes, especially since dividends were already being taxed.
They also suggest a single-digit interest loan scheme for industry operators and consumers to mitigate the effects of the increase. Proposing that government has to put in place structures to plug revenue leakages and ensure transparency in the appropriation of VAT funds which would largely help boost taxpayers’ confidence in the system, the experts want issues such as full recoverability of VAT on services and VAT-exempt items to be adequately addressed as a number of Nigerian businesses are currently unable to recover their input VAT on services and exempt items.
Operators also say the increase would shoot the cost of doing business and force many to close-shop, thereby increase unemployment and promote poverty.
According to them, businesses can pass this tax on to consumers in higher prices, but it will also affect the bottom line. A study showed that government’s spending policy affects business and that VAT has significant effect on gross domestic product and also on total revenue of Nigeria.
Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, who gave reason for the planned tax increment, said: “We are proposing and council has agreed to increase the VAT rate from five to 7.2 percent. This is important because the Federal Government only retains 15 percent of the VAT; 85 percent is actually for states and local governments.
“The states need additional revenue to be able to meet the obligations of the minimum wage,” Ahmed explained.
Vice President Yemi Osinbajo had said the new VAT rate is still low when compared to that of other African countries. Osinbajo said the finance law would speed up Nigeria’s economic growth and result in increased revenue for all levels of government.
“Ghana has 12.5 percent; Cameroun has 19.25 percent; Mexico with 16 percent; South Africa at 15 percent and Egypt at 14 percent.
“To make things easier for the common man, we have exempted 16 classes of food items, tampons, sanitary towels, and tuition fees from nursery to tertiary,” Osinbajo reportedly said.
The vice president expressed confidence in the economy, saying the government would continue to provide the enabling environment for businesses to thrive. Regardless, operators of Micro, Small and Medium Enterprises (MSMEs) have been groaning in view of the effect of the increase.
They are soliciting tax holiday, pleading that government should make ease of doing business more attractive for small businesses and foreign investors instead of increasing tax burden.
Stakeholders argue that while an increased VAT regime will improve government revenue profile and help it meet some fiscal needs, small businesses would certainly bear the brunt. If VAT is increased, they said it will make it costly for SMEs to do business because they have to calculate VAT on every product at every step of the process. (increase in the amount of accounting a business needs to perform).
They are of the view that small business owners will also have to increase prices of their products and services, which in the long run will stifle sales, querying government’s integrity to judiciously use the funds generated from the increased VAT.
President of LCCI, Toki Mabogunje, noted that the Finance Act is aimed at generating more revenue for government and making the business environment more enabling by reducing the tax burden on micro, small and medium enterprises. She also added that the act will help support the funding and implementation of the 2020 budget. However, she noted that the new tax regime does not bode well for manufacturers and other stakeholders in the real economy as it will affect cost of production and profit margin, with consumers at the receiving end.
“The VAT hike has implications for inflationary pressure and consumer demand. We advise government to utilise the additional income that will be generated from the increase in VAT to develop quality infrastructure, not only on payment of worker’s salaries.”
On her part, Lagos Chairman of Nigerian Association of Small Scale Industries (NASSI), Gertrude Akhimien, suggested that the Federal Government has to implement tax waivers and deductions to strengthen SMEs. She demanded improved infrastructure and single-unit credit schemes.
A Chief Executive Officer of Clothing and Garment Limited, based in Lagos, Chikaodili Mbah, said in developed countries, where SMEs have electricity, good roads, access to funding and more, people do not mind when government charges exorbitant taxes because entrepreneurs know what they would do with it.
She noted that the tax government collects is not being translated to good use, to provide infrastructure.
She said government should give SMEs tax holiday and not tax increment. “Government should make business more attractive for us and foreign investors instead of increasing tax.”
Another entrepreneur, Umoh James, also said government has no basis increasing tax when it has not improved on infrastructure to create enabling environment for SMEs.
James noted that many small business owners have to spend a lot on infrastructure, and queried the basis for increasing VAT.