VAT Increase: Robbing Peter To Pay Paul -By Bámidélé Adémólá-Olátéjú

Nigeria is in a fiscal hole. The country needs creative approaches to beef up its revenue to meet the needs of its ballooning population. But, is an increase in value added tax (VAT) the way to go? The argument that VAT in Nigeria is low, and should go beyond the headline figure of 5 per cent is lame. It exposes the inadequacy of the management of the Federal Inland Revenue Service (FIRS). Proponents of VAT claim that it is a progressive tax. That is: individuals who pay the most VAT spend the most on purchases. This line of reasoning is not true of Nigeria’s tax system, where there are few exemptions for the poor and vulnerable. This means that poorer people pay higher proportions of their incomes as VAT.

A tax on every stage of the production process was first theorised in Germany in the mid 1800s. In 1954, French author and tax authority, Maurice Lauré birthed it. VAT is an indirect tax because the government receives the payment from the vendors of goods and services. For this reason, factors such as purchasing power parity, multiple taxation and the exchange rates should be factors in determining VAT. For example, what in dollar terms is the minimum wage of countries charging higher VATs? What is their level of access to healthcare through their different national health insurance coverages? Nigeria’s health insurance coverage is bathetic in comparison to that of Togo and Ghana, not to mention South Africa and Rwanda, etc. Widening the coverage of VAT collection and not increasing it is key. Nigeria has a lot to learn from the French West African countries. Unfortunately, Nigeria’S fiduciary trustees are either too lazy or THWY lack the intellectual humility to learn. Two generations have been brought up in French West African countries immersed in paying VAT as a matter of course. We should have looked at the effectiveness and extent of collection and we did not.

Doubling the number of those paying makes more sense than increasING the burden on the same people. A distorted federalism is also at play here. In most federal countries such as Brazil, for example, VAT ranges from state to state. In Nigeria, the states have no incentive to collect VAT, which is stupid. This increase is going to be deflationary. Purchasing power is weak already, meaning that manufacturers will carry larger unsold inventories, leading to labour layoffs. This increase in VAT rate not only shows that we are not ready to face the real problems but that we are determined to rob Peter to pay Paul. For too long Nigeria has been living above its means. We keep borrowing to finance deficits, and this is unfortunately channelled into consumption. Nothing forces discipline unto a man like debt, which compels him to adjust when he is no longer credit worthy. The same goes for us. The problems we must solve are: one, petroleum subsidy. This is an economic killer that cannot continue. The tiered foreign exchange rate and the opportunity for arbitrage that it presents is economic sabotage. It serves no real purpose other than allowing some influential people to send their children to school abroad and fund their extravagant lifestyles on our backs. The electricity tarrif rate per kilowatt is ridiculous. It is unsustainable! The sector needs liberalisation to bring in the Siemens, the Marubenis and the GEs. How about the cost of government, especially the extravagant legislators? The government’s refusal to consider the report of the Oronsaye recommendations on the costs of the machinery of the government was daft. Nigeria’s current accounts deficits and debt repayment is now out of hand.

Now that the ugly financial figures are coming in, can the newly constituted economic team save us? Will they be listened to? Our debt and population are what will restore our brain, as a country, to factory setting. The question is: Will we face this now, pick our poison or kick the can down the road? Whatever it is, we are in trouble.

Bámidélé Adémólá-Olátéjú a farmer, youth advocate and political analyst writes this weekly column, “Bamidele Upfront” for PREMIUM TIMES. Follow me on Twitter @olufunmilayo