VAT rate increase? Matters arising By Posi Olatubosun

In the effort to keep the wolf from the door, even as the federating states continue to go broke, there have been inferences that the government may increase the VAT rate. No official confirmation to this effect was ever made by the FIRS, and no VAT Act amendment bill has been presented to the federal lawmakers. However, the Vice-President recently let the genie out of the bottle, meaning that a rate hike may be inevitable.

The primary aim of introducing the VAT was to replace the hitherto ineffective sales tax as a means of generating revenues for government. There was an attempt to increase the rate to 10% on the eve of the departure of the Obasanjo regime in 2007, but the subsequent government refused to ratify the increase due to the absence of any legal instrument supporting the rushed increase (precisely the amendment of the Section 4 of the VAT Act of 1993), and so the rate reverted to status quo.

Some public finance economists have argued that if Nigeria had tabled a request for an IMF financial bailout at the beginning of the year, VAT administration reform, not the least an increase in the VAT rate, would have been thrown at us as a sine qua non. But then, is it the right time to increase the VAT rate? What sorts of reforms are necessary to make the VAT administration in Nigeria fit for purpose? Where does Nigeria stand on VAT administration relative to her neighbours? These questions are relevant now.

Normally, the fiscal policy managers are expected to adjust the rates to suit the prevalent economic stabilisation objectives of government. Many European countries increased their standard VAT rates during the economic recession as a means of supplementing lost revenues due to rising unemployment. For instance in 2010, the then UK coalition government increased the standard VAT rate from 17.5% to 20% in order to provide monies for rising unemployment benefits to the jobless citizens occasioned by the economic recession.

Now let’s collocate the rates. Currently, Nigeria, Eritrea and Djibouti have the lowest VAT rates in Africa, and by extension, in the world. Compare these to the average of 15% standard VAT rate obtainable in the African continent, whilst the EU average is 20%. In the West Africa sub-region, the current standard rates of VAT are: Ghana, Sierra Leone and Gambia 15%; Liberia 12%; Franco-phone West Africa 18%; and Cameroon 19.25%. Based on the financial position of the government purse right now, coupled with the comparative indicators listed above, there seems to be a prima facie case for an increase in the standard VAT rate in order to supplement government revenue. On the other hand, the economic indicators are fragile. Increasing the rate now may likely become a bear with a sore head, driving the taxpayers up the wall. Obviously the government will get the flak when inflation gets out of hand as a result.

However, based on comparative knowledge of VAT administration in other jurisdictions, as well as the outcome of hot debate with professional accounting practitioners in Nigeria, it will be expedient for the government to consider implementing the following in order to increase the monthly VAT collections without increasing the VAT rate, thereby averting the incidence of taxpayers getting their knickers in a twist! The tax net needs to be widened without burdening taxpayers with additional taxes. Government should endeavour to link all its vital taxpayers’ records together by ensuring zero duplication of data.

For instance, the BVN, voters record, National ID card, VAT registration numbers, Unique Tax Identification Number, Corporate Affairs Commission registration number, vehicle licensing, drivers licensing, police records, prison records, must all be linked together. Once this is done, revenue leakage through VAT non-compliance by many SMEs would have reduced massively. The level of compliance can then be monitored effectively at minimal costs, and erring tax evaders punished in order to serve as deterrent to others. The result would be an uncharted rise in VAT monthly collections. Electronic systems are capable of absorbing the universal revenues generated by all economic agents, so that no one escapes the tax net. The earlier this is done, the better for the tax authorities.

In addition to the 5% VAT charged by the FIRS, some (not all) State Internal Revenue Service are also levying 5% sales tax on goods and services. If this practice becomes the norm throughout the federation, then it would be better to unify and standardise the procedure so that 5% accrues to the FIRS, and another 5% to the SIRS. This is another valid case for the cessation of any plans to embark on a VAT rate hike. Perhaps, if the FIRS was able to successfully persuade the respective SIRS to eradicate the sales tax, an increase in VAT rate could be justified.

In the OECD environment, the operational VAT structure (a consumption-based model) facilitates full recovery of VAT paid on inputs which ensures that effectively, the total VAT paid on all productions in the whole value chain does not exceed the VAT levied on the final product or service. On the other hand, FIRS operates a gross production model (not too different from sales tax) where VAT paid on services inputs cannot be recovered. The effect of this is that, in a fairly long value chain, the effective VAT borne by the final consumer may rise to anything between 15% and 30%. It is, therefore, expedient that the FIRS grants corporations input reliefs for any planned VAT increase to be justifiable.

There are pressures on the government at all levels to improve the lives of their citizens through capital projects funded from tax receipts. But then many of the federating states are unable to meet their salary obligations, talkless of developing and implementing capital projects. Nonetheless, Nigeria has the advantage of a large population, many of whom are within the active working age. The citizens ought to be continually educated on the need to perform their own role in the governance partnership, which involves paying their own fair share of taxes without which there cannot justifiably be expectation of performance from the government.

The alternative to payment of taxes is that government will borrow, which is equivalent to pushing liabilities to the incoming generations! It would be expedient to enforce the existing rules and ensure a high level of compliance with tax laws through the use of efficient means, rather exploring the easy way out in the form of increasing tax rates. Tax hike at this time is capable of encouraging business taxpayers to manipulate the system for their own benefit and increase non-compliance with the existing laws. It may become a red flag to the bulls who have been driven up to the wall. The possibility of flying off the handle may be expected and this may not be politically expedient after all.