Economy
New tax increases may worsen inflation —Experts
By FELIX OLOYEDE
The planned increase of the Value Added Tax (VAT) by the Federal Government would further worsen the plight of Nigerians, financial experts have cautioned.
The Chairman, Federal Internal Revenue Service (FIRS), Babatunde Fowler, last week hinted that VAT which currently stands at five per cent would be jacked up by 50 per cent.
“I can certainly see an increase in VAT of at least 35 per cent to 50 per cent this year based on our enforcement activities. There certainly will be an increase in Company Income Tax and also on Petroleum Profit Tax,” Mr Foweler said while appearing before Senate Committee on Finance at the 2019-2021 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper ((PSP) interactive meeting with the Minister of Budget and National Planning, Senator Udo Udoma.
And the Minister of Budget and National Planning explained that revenue raise through the increment in VAT would be used to pay the increased workers’ salaries.
“Increasing VAT will decrease consumption and even productivity and it will further slowdown the country’s economy,” Johnson Chukwu, Managing Director, Cowry Asset Management Ltd told Business Hallmark.
He, however, noted that the negative impact of the increase in VAT could be lessened with the implementation of the new N30,000 minimum wage, which was passed by the National Assembly.
The Manufacturers Association of Nigeria (MAN) has warned that with the country’s high misery index rating, low per capita income, heavily lopsided income distribution pattern, increasing VAT at this point in time, would further exasperate Nigeria’s economic vulnerability.
“No controversy, the burden of the tax would be shifted to the Nigerian consumers that are already struggling, the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted, many factories will witness serious downturn or wind down operations,” MAN’s Director General Segun Ajayi-Kadir asserted.
The Association advised Federal Government to widen the tax net instead of increasing the rate to meet the growing need for more revenue to address the development objective of the country.
Nigerian economy has been growing in a slow pace since it recovered from its 18 months recession in June 2017.
The country’s economy expanded by 1.9 per cent in 2018, while the population has been growing at 2.6 per cent.
Unemployment has risen from below 10 per cent in 2015 to 23. per cent in Q3 2018 as challenging operating environment has compelled many companies to cut down production and laid-off workers.
Although the FIRS has denied plans to raise VAT by 50 per cent, Gov. David Umahi of Ebonyi State described government’s plan toincrease VAT as ‘digging a hole to fill a hole’.
He noted that increasing VAT to pay new N30, 000 minimum wage would worsen the economic woes of Nigerians.
“When VAT is increased from 5 per cent to 35 per cent, it means that anyone who wants to buy something will pay 30 per cent more than what he used to buy,” the governor argued.
The Federal Government has often claimed the country has one of the lowest tax rates in the country compared with almost all other countries in the sub-Sahara region that have a VAT rate above 10 per cent.
But Dr. Adi Bongo, economist and a Faculty Member, Lagos Business School, claimed the government is planning to increase tax without considering the rising cost of living, low income, high poverty and unemployment rates, etc. in the country, adding that this is anti-welfare.
“The government has no welfare package for the people. All they know is taxing the people,” he stated.
Nigeria has been making frantic efforts to increase its tax-to-GDP ratio, which currently stands at 7 per cent as the Federal Government launched the Voluntary Asset and Income Declaration Scheme (VAIDS) in July 2017 with the aim of widening the country’s tax net.
Significant progress has been made in tax revenue under President Muhammadu Buhari administration, raking in over N5 trillion last year, the highest the country has made in a single year.
However, despite this increase Nigeria’s budget deficit has continued to widen as its debt also soars.
The country’s debt has risen 78 per cent in the last four years to N22.43 trillion in September 2018, as the government cut down the deficit in the N8.73 trillion budgets for 2019 by 3.07 percent to N1.895 trillion from N1.95 trillion in 2018.
Its debt to GDP ratio stood at 23.3 per cent as at 2017 and the International Monetary Fund (IMF) had projected it to hit 24.1 per cent by 2018.
The IMF like other multilateral organizations has raised concern over the huge interest the country is paying to service its debt, which stood at 68 per cent of its total revenue in 2018.
But government has argued that there was no cause for alarm as the country’s debt to GDP was still one of the lowest in the African region.
Why Federal Government Should Not Increase VAT — MAN
- The economy just recently exited recession with the fragile growth rate of less than 2% recorded in 2018 and should be delicately managed.
- The precarious macroeconomic condition of the country requires palliatives that would improve investment and not higher tax burden
- The prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91% growth rate amidst 2.6% population growth rate that are already cumulatively limiting competitiveness could be further worsened.
- Any increase at this time would not be in sync with the standard practice that expects the administration and implementation of VAT to be effected in a manner that distortion and possible adverse effect on the economy are minimized or avoided.
- An increased VAT will spur spontaneous increase in inflation rate occasioned by increased prices of goods and services
- The obvious resultant effects of implementing an increased VAT on the manufacturing sector includes lower purchasing power of consumers, sharp reduction in consumption, drop in sales, decrease in production capacity, lower Government revenue, increase in unemployment and stifled economic growth.
- Unfair comparison of VAT rate in Nigeria and other countries in Africa forgetting the fact that macroeconomic dynamics and the level of competitiveness in these countries are not the same with that of Nigeria.
- The fact that many States of the federation also have other consumption taxes like VAT currently being levied on businesses should call for circumspection.