Cash crunch: Nigerians to pay more tax

24 January 2015, Lagos – Against the backdrop of the economic crisis plaguing Nigeria amid falling global oil prices, the Federal Government is considering changes to the nation’s tax regime in a bid to shore up dwindling revenue.

Mrs. Kemi Adeosun, Minister of Finance

rs. Kemi Adeosun, Minister of Finance

There are indications that the government will increase Value Added Tax, as recently suggested by the International Monetary Fund, whose Managing Director, Ms. Christine Lagarde, visited the country early this month.

Economic and financial experts have, however, said the move to increase VAT would put further pressure on Nigerians, as it would cause increase in the prices of goods and services, among other implications.

VAT is a consumption tax payable on the goods and service consumed by any person, whether government agencies, business organisations or individuals. It is currently levied at the rate of five per cent in the country.

The sharp drop in crude oil revenues, which provide 95 per cent of the country’s foreign earnings, has led to significant depletion of the nation’s foreign reserves.

Oil prices have fallen in the last few days to their lowest levels since 2003, trading about $10 lower than the oil price benchmark of $38 proposed by President Muhammadu Buhari for this year’s budget. Oil prices staged a rebound on Friday, trading around $32 per barrel on Saturday.

The Minister of Finance, Mrs. Kemi Adeosun, has said the Federal Government plans to borrow up to $5bn from multiple sources, including the Eurobond market, to plug its budget deficit.

Buhari had in December presented a total budget size of N6.08tn, with a deficit of N2.22tn to be financed by both domestic and foreign borrowings of N1.84tn.

He put the revenue projection for the year at N3.86tn, adding that over the medium-term, the government expected to increase revenues and reduce overheads, to bring the fiscal deficit down to 1.3 per cent of Gross Domestic Product by 2018.

Vice President Yemi Osinbajo, who said changes to taxation were being considered, told CNBC in a television interview, “We are looking at increasing our tax coverage.

He added, “VAT, for instance — we have been doing just about 20 per cent coverage. We think that just by increasing coverage, we could do much more, and so we could earn more in terms of local resources,” he said.

Increasing VAT from 5 per cent, among the world’s lowest VAT rates, and broadening the tax base were among suggestions put forward by the IMF boss during her visit.

During her visit, Lagarde also said the IMF did not support foreign exchange restrictions.

The Central Bank of Nigeria, whose monetary policy committee will meet on Monday and Tuesday, imposed forex restrictions last year aimed at conserving foreign exchange reserves and there have been calls from investors for these to be eased.

“We know that the central bank will just have to do the right thing at this time. The central bank has told us, and it was announced even in the president’s budget speech, that they intend to take a flexible approach and deploy whatever tools are necessary to ensure that we stay competitive,” Osinbajo had said.

A Professor of Financial Economics at the University of Uyo, Akwa Ibom State, Leo Ukpong, described the move to increase taxes as ill-timed, saying any increase in VAT would lead to declines in consumption and investment in the country.

He said, “It is not that it is bad to increase taxes; what is bad is increasing it at the wrong time. When the economy is going through recession; when we are not producing; when unemployment is high, that is not the time to raise any tax. In fact, the opposite is the case: it is a time you cut taxes so that you can stimulate consumption and investment.

“Increase in VAT is going to destroy the economy more. Consumption of goods and services will drop because you’re taking money away from people, and investment will drop. Overall, it is going to have negative effects on the economy, households and businesses.”

The Head, Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said the government should explore all avenues to ensure compliance as well as improve on its collection mechanism before considering increase in tax rates.

He said, “Raising VAT will lead to increase in the price of goods and services; cost of production will go up as well as cost of goods. It is going to be telling on Nigerians in the interim. However, if this fund is channelled to proper use, the multiplier effects will cushion the impact of VAT on Nigerians

“If we are able to get good roads, rail and power supply, these are some of the things that form the larger part of the cost of production — it is going to be a short-term pain to get a long-term gain.”

Professor Sheriffdeen Tella of the Department of Economics, Olabisi Onabanjo University, said the government might want to consider increasing taxes in some areas and expand the tax net in some other areas to capture more people and organisations.

He said, “There are a lot of people and organisations that are not paying tax, particularly in the informal sector. The government has to work out a way to capture the informal sector taxes.

“It is not as if they want to impose taxes generally. Let us look at VAT, for example; there are some assets that can be regarded as luxury items. They can increase the tax regime on those assets. People hardly pay tax on wealth in this country. They need to capture those people (the wealthy).”

According to Tella, government needs to raise funds to be able to execute projects and tax is a major thing in increasing internal revenue.

“I think it is not tax changes that will further affect the common man. They can also reduce the tax paid by some levels of income-earners,” he added.

A Partner and Head, Tax Regulatory and People Services, KPMG Nigeria, Mr. Victor Onyenkpa, said, “Given that oil is what it is today, tax is crucial in raising money, and the one that they have talked about is VAT, especially so that they want to increase the rate. The problem is that VAT, as we operate it in Nigeria, is a sale tax.

“Increasing VAT, to my mind, is fine, to the extent that it is together with making companies have recoverable input VAT.”

According to Lagarde, the new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria’s oil wealth, but what needs to be done so that Nigeria can deliver to its people the public services they deserve.

She said, “This means that hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward. My policy refrain is this: Act with resolve — by stepping up revenue mobilisation.”

 

 

 

  • Punch
About the Author