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How VAT Raise Will Trigger Another Economic Recession

How VAT Raise Will Trigger Another Economic Recession

· FG’s taxation drive wont solve economic woes – Experts

· Manufacturers demand clarification on indefinite border closure

By Kenneth Jukpor

The proposed increment of Value Added Tax (VAT) from 5% to 7.5% may seem minimal but according to economic experts, the development coupled with the fragile state of the nation’s economy could throw Nigeria into an economic recession.

Economic analysts have lamented that the timing of the proposed VAT increment was inappropriate, warning the Nigerian government that its penchant to deepen revenue generation via excessive taxation would be counterproductive for the nation’s economy.

Recall that the Minister of Finance, Mrs. Zainab Ahmed said that the proposed increase of the VAT rate from 5% to 7.5% by the federal government via its Strategic Revenue Growth Initiative, is subject to the review and approval of the National Assembly.

Speaking with MMS Plus newspaper on this development, the Managing Director of Cowry Assets Management Limited, Mr. Johnson Chukwu said, “Nigeria has over 94 million people living in poverty. If you impose VAT increase that would lead to further reduction in consumption, it would affect the manufacturing sector and the trade sector. Additional charges could tip the scale in the economy and lead to an economic recession” he said.

Ideally, an increase in VAT should be imposed when the economy of a nation is buoyant and not when an economy is in a very weak situation, experts have posited.

According to Johnson Chukwu, the benefits of VAT should be to moderate the level of consumption but he lamented that Nigeria’s consumption has weakened as a result of the weak consumer demand.

Although he noted that Nigeria’s VAT rate was one of the lowest in the world, he maintained that the economy was in a weak condition as the second quarter Gross Domestic Product (GDP) figures showed that the manufacturing sector and the trade sector were in negatives and most of the sectors apart from the telecommunication sector were all in the negative.

“Those sectors that didn’t go into the negative had a slower growth rate. So, I think that this might not be the most auspicious time to impose consumption tax that would weaken the power of the citizens, lead to an increase in cost and may not necessarily expand the revenue base of the government” he explained.

Similarly, the Coordinator, Transport and Logistics Group, Nigeria Economic Summit Group (NESG) Dr. Ikenna Nwosu told our correspondent that the move to increase VAT rate was taking place at a wrong time.

“My perspective is that the timing is wrong. There is no problem with regards the proposal to increase VAT but this isn’t an appropriate time. The nation’s economy is too fragile to take this at the moment considering the value of naira, the low purchasing power of people and the evident drop in liquidity. The decision to increase VAT at such a time should be shelved. It is not advisable at such a dedicate stage in the nation’s economy” Nwosu said.

However, the President of Manufacturers Association of Nigeria (MAN), Engr. Mansur Ahmed lamented that the VAT increase would further impoverish ordinary Nigerians already affected by the low purchasing power.

Ahmed who was speaking during an exclusive chat with MMS Plus, lamented that there was a large number of people evading tax or paying incorrect sums, therefore, he advised the government to ensure that those who are eligible to pay taxes, actually pay and pay the correct sums.

“Government is still having challenges with the implementation of the minimum wage. When you look at this development, it’s like the government has given out something to the people with one hand and collected it with another” he said.

“At MAN, we have always advised that government explores ways of reaching its objectives via ways that cause the least pain on the citizens. In this case of taxation, the first thing should be to ensure that those who are eligible to pay taxes are actually paying and paying the correct sums” he added.

Meanwhile, the Lagos Chamber of Commerce and Industry (LCCI) described the proposed VAT increase as an additional burden on investors.

The Director General of LCCI, Mr. Muda Yusuf told MMS Plus that the profit margins investments growth, consumer purchasing power and competitiveness of firms will be adversely impacted by the VAT increase, making the policy a wrong one.

“Already, businesses have been grappling with the challenges of multiple taxation, high import duty, high regulatory charges, exclusion from the official forex market and high energy cost”, he lamented.

He also noted that it was disturbing that in Nigeria, VAT isn’t treated as consumption tax. “In Nigeria, most times VAT is imposed on the entire value chain of production and investment. Intermediate products are also often subjected to VAT. This is why investors would worry about the proposal to review the VAT” he said.

He said that while LCCI acknowledges the severe revenue challenges facing the government which has impeded its capacity to provide basic services and infrastructure to the citizens, it was also pertinent to realize that there is a relationship between investment growth, private sector development, economic performance and revenue performance of government.

“We urge the government to scale up its commitment to the creation of an enabling environment for investment in the country and this should be from the perspective of policy environment, regulatory environment and the macro-economic environment” the LCCI Director General said.

Johnson Chukwu also shared similar thoughts on managing the nation’s economy noting that the government’s focus on excessive taxation wouldn’t dissipate the economic woes in the polity.

“The focus of the government on taxing the citizens more may not be the solution to the economic challenges the nation is facing. I believe that the first thing the government should be considering is to come up with policies that would expand economic activities and expand productivity for more income. With that expanded income, even at the same VAT rate the government would be able to generate more revenue. Increasing VAT alone may not be a bad idea, but would this have a positive impact on government revenue given the level of poverty in the country” Johnson Chukwu said.

In another development, MAN has demanded clarification from the federal government on the indefinite closure of the land borders lamenting that genuine importers and exporters have been thrown into untold hardship.

Speaking on the prolonged border closure, MAN President, Ahmed lamented that manufacturers involved in cross border trade to import raw materials as well as export have been handicapped by the development.

“There should have been consultation particularly with genuine importers and exporters. People should have been given some time to prepare for this. While we recognize the fact that some level of actions would be needed to curb smuggling which is why the border was closed, we must recognize that closing the border permanently isn’t a solution especially with the African Continental Free Trade Agreement (AfCFTA). If the intention was the short period of time while the government explores other ways to improve the control of the border that would have been understandable” he said.

While he stressed that manufacturers need clarification on how long the border closure would last, he also demanded that the government provide measures to alleviate the pains of the users of the borders, especially those who have had their business hampered by the action.

Narrating the ordeal at the Seme border, a businessman based in Badagry, Mr. Chris Iloh told MMS Plus, “There are over 750 trucks loaded with  Nigeria -bound import goods trapped at the Benin Republic flank of the border. Duties and incidental  charges have been collected by Customs  from  over 50% of the trapped consignments following the controversial ‘surprise attack’ border closure,  which has become a subject of discussions at African Union forums with critical comments coming from  other member nations”

“The duties collected so far from these trapped goods are, probably  what  Customs has computed to mean revenue earned.  This is misleading and wrong in Accounting because the monies paid by the importers are not yet revenue earned by the Customs until the goods are finally released by the Customs. No revenue has been collected at SEME since the border closure” he said.

He stressed that it would have been logical to argue that the importers of the trapped goods have diverted their other consignments to Apapa or Tin Can ports, but this was not the case.

The situation at the border was further complicated last week when the Comptroller-General of the Nigerian Customs Service, Col. Hameed Ali (Rtd) the National Assembly members that the agency has been raking in between N4.7bn and  N5.8 bn since the nation’s borders were closed.

While Nigerians are miffed as to what ways the Customs been better off in revenue as a result of the ‘Swift Operation’ , Ali gave this report to the Senate and House of Representatives joint committees on Finance and National Planning, working on the 2020-2022 Medium Term Expenditure Framework and Fiscal Strategy Paper.

Meanwhile, the Comptroller-General had earlier revealed that the Service increased its revenue generation to the region of N5.5 billion daily in June this year, an account which indicates that the figures given last week weren’t connected to the border closure.

Industry observers have accused the Customs boss of desperately shopping for reasons to justify the unpalatable government policy.

The border closure has become an additional toll that the federal government has set for the Customs and other agencies whose duties are to work at the border.

“Rice is still being smuggled through the land borders. This action by the government would only help to increase the amount that people pay to bring these products into the country. We have already seen an increase in the value of rice in the market. Foreign rice is available at N24,000 to N25,000 per bag” a rice dealer told MMS Plus.

This regular supply has been stressed as an indication that smuggling still thrives, but at a higher cost, meaning more income for those involved yet government gets no revenue. However, with over 2,000 border routes, one can’t expect the border closure to miraculously end this problem.

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