Aug 11, 2015

Proposed VAT increment: Common man’s nightmare

Credit - Google

The Federal Government is set to increase Value Added Tax from its current rate of 5% on goods and services to 10%. It was disclosed on Friday 7th of August 2015 by Mr. Sunday Ogungbesan, Acting Chairman, Federal Inland Revenue Service (FIRS), while speaking with the media.

According to him, increasing the VAT was one of the measures being considered by the Federal Government to shore up the revenue of the country that had suffered a slide since the slump in crude oil price started last year. Nigeria earns about 80 per cent of its revenue from oil exports.

If you are a fellow in the Chartered Institute of Taxation or you have a degree in Finance, you can skip this article. The purpose of it is to try to explain the effect of the proposed increment of VAT on Nigerians and Nigerian businesses.

What is VAT
First thing to know is what VAT really means? Who imposes and who suffers it?

 What is exempted from Tax?

VAT is a consumption tax payable on the goods and service consumed by any person, whether government agencies, business organizations or individuals. The target of VAT is consumption of goods and services and unless an item is specifically exempted by law, the consumer is liable to the tax. It can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is levied at the rate of 5%. 

In Nigeria, the VAT system started with acceptance of the recommendation of a study group on indirect taxation in November, 1991. The decision to accept the recommendation was made public in the 1992 budget speech of the Head of State. This resulted in setting up the Modified Value-Added Tax (MVAT) committee as recommended by the study group. Tax administration was however given to federal Inland Revenue Services (FIRS).

Value-Added Tax is tax on the supply of good and services which is eventually born by the final consumer but all collected at each stage of production and distribution chain. With VAT, government reasoned, it will be virtually impossible to evade tax.
Credit - Google
Items exempted from VAT
VAT exempts essential goods such as all medical and pharmaceutical product basic food, books and educational material, newspapers and magazines, baby products, fertilizer agricultural and veterinary medicine, farming transportation equipment. While, services exempted include medical services, services rendered by community bank’s, people’s bank and mortgage institution as part of learning. All diplomatic items are exempted as covered by international agreements and airline tickets for international travel. You practically pay tax on every other thing that does not fall in this category.

VAT from 5% to 10%

The proposed increase will be very unfair to the Nigerian populace if it is based on the fact that the rate of vat which is 5% as stipulated in section 4 of the Vat Act 1993 is one of the lowest rates in the world, as claimed by the FIRS acting boss.
Studies have shown that other countries with higher rates have got a lot to show for it, in terms of good infrastructural facilities and social amenities in the country that is adequately sufficient and highly beneficial to citizens.

This is seen to be a severe austerity measure on the masses in the long run, considering the fact that every individual in the country has to consume goods and services that are vatable in other to survive, since it is charged on almost all consumable products.

Increase of the VAT rate will cause;
• Death of startup companies
Increase in VAT rate will make operating expenses consume a huge part of their revenue, and they are left with the option of providing for themselves what is meant to be provided by the government for them to continue in business. It is pertinent to note that a manufacturer battling with little or no profit, will find it unbearable paying the increased tax on their minimum profit.

• Increase in Inflation rate
Manufacturers, who are opportunists, will take advantage of the increase in vat rate, to shoot up their prices. Government wants to get a part of the insufficient income left with the citizens, who are left with the only option to spend majorly on necessities. There is always an adverse effect on the economy.

Other possible disadvantages of the implementation is regressive effect on low income earners leading to poor savings, intractable increase price level (even beer, suya and sharwama sellers will increase prices like a loose cannon) and practical difficulties of implementing the VAT rate.

In conclusion, it is therefore advisable that the legislature and other critical stakeholders should frown at this heartbreaking revenue generation policy government is about to embark on (in the interest of the people).

By: Sogo Akinola 

Sogo Akinola Nathan is a young commercial lawyer at GbengaBiobaku and co. He specializes in Taxation, oil and gas law and Real Estate. He is a graduate of ObafemiAwolowo University and the Nigerian Law School. He is a member of the Nigerian Bar Association and a member of the Association of Young International lawyers and  Young International Arbitration Group and also an intending associate member of the Chartered Institute of Taxation of Nigeria