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For Dummies Guide: Nigeria’s proposed tax increase

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For Dummies Guide: Nigeria’s proposed tax increase

Nigerians are up in arms over news of a potential hike in Value Added Tax (VAT) and Corporate Income Tax (CIT) as government seeks to raise additional revenues to meet the demands of the newly increased minimum wages.

There will certainly be an increase in CIT (Companies Income Tax and also on PPT (Petroleum Profits Tax).— FIRS Nigeria (@firsNigeria) March 20, 2019

Why it matters: Raising the two main taxes – VAT and CIT – will have sweeping implications.

VAT is essentially linked to consumption so it is expected that the consumers would pay more for products and services which could trigger an inflation according to several analysts. But there are some arguments in favour of a VAT hike. Nigeria has one of the lowest tax to GDP ratio (5.9%) in Sub Saharan Africa, and ranks as one of the countries with the lowest VAT rates at 5%. While there is a need to increase rates as the country looks to diversify its revenue, there is an opportunity to expand the net by also capturing the informal economy.

The timing of this proposal given the state of the economy is also quite problematic and the intent is morally questionable. Raising tax that could potentially hurt businesses and growth in other to finance the pay raise of an ineffective and over bloated civil service sounds like a terrible plan.

On the flip side, Nigeria’s CIT (30%) is higher than the Africa average of 28% and experts have argued for a long time that it hurts the ability of Nigerian businesses to survive in a mean environment where they are crippled by the same bureaucracy – bottlenecks – and lack of access to affordable credit. Small businesses which thrive on small margins would be the most affected casualty. This will ultimately result in more unemployment which already stands at an all-time high.

Incoherent strategy
It appears the government lacks a cohesive strategy. The recent announcement appears to be at variance with an earlier hint of the VAT hike proposal by Finance Minister Zainab Ahmed in January. Ahmed, who spoke at an inter agency meeting which had officials of the Revenue Service and the Customs in attendance, had said the government was only thinking of raising taxes on specific items. There was also talk about expanding the scope on excise to include carbonated drinks, which will not only raise revenue but also improve public health.

“It is most likely the VAT increase will be selective. It will be on special items so it won’t be across the board. I am sure you are already aware that there are a number of items that are exempted from VAT such as food and drugs.

“There would be a VAT increase during the course of 2019, we will announce later the items and what the rate will be. We will have to take a request to the National Assembly for amendment of the VAT law before it takes effect,” said Ahmed.

In mid 2018, the former Finance Minister, Kemi Adeosun informed Nigerians of the administration’s proposal to implement a 10 to 15% reduction in CIT for Micro, Small and Medium Enterprises (leaving the rate at between 15 – 20%). But it appears that this proposal has also been discarded based on the current proposals.

What the experts are saying:

  • Taiwo Oyedele, Tax Expert PWC: “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 conflicting strategy.”
  • Godwin Oloke, Chartered Institute of Taxation Nigeria:  “It will be profitable for government to reduce CIT and other direct taxes but increase rate of indirect taxes especially on luxury items. Government should not maintain a regime of high CIT and high VAT.”
  • Seun Smith, Finance Analyst: “While I am generally in favor of a VAT increase, it should not be implemented as a standalone strategy. Rather it should be part of a comprehensive package of tax and structural reforms that not only raise fiscal revenues but also stimulate trade and investment.”

Bottomline: The proposals are incoherent, badly timed, morally despicable and potentially disastrous. Nigerians are as confused as the administration about what the direction really is. 

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