BY Guest Writer
BY AYO BANKOLE AKINTUJOYE
On Thursday, September 12, 2019, news broke that the Federal Executive Council (FEC) had approved plans to increase Value Added Tax (VAT) from 5% to 7.5%; representing a 50% increase. It is worthy of note that the current 5% VAT regime has been in existence for over 25 years (Since 1994). Although it is still subject to National Assembly Approval which may take several months, it is important to analyze how this new development may impact the livelihood of majority of Nigerians; particularly the over 60% who currently live at the bottom of the pyramid, especially in the face of the disingenuous attempt by government agents to portray VAT as a tax that mainly applies to the rich and to portray it as the only option of government to increase revenue.
On the contrary, VAT is imposed on all goods and services sold in Nigeria, including imports; as stipulated under section 4 of the VAT Act, except for items that are VAT exempt. What this means is that every Nigerian will either directly or indirectly, be affected by a whopping 50% increase in VAT. Another implication of this is that even if you transact only in the informal sector, that is largely outside of the tax net, other items such as clothing, processed food items, shoes, etc. are VAT-able and will be charged.
The Nigerian minimum wage had been at a paltry ₦18,000 ($50 – using current exchange rate) since the year 2010, following series of negotiations with the Labour Union, under the then President, Dr. Goodluck Jonathan. Despite the devaluation of the Naira, for a little above nine (9) years the minimum wage remained same while other macroeconomic indices that impacted average cost of living increased. This further negatively impacted the condition of livelihood of the average Nigerian. Below is a graph showing how the minimum wage declined and then flatlined over the last four years, despite increase in inflation rates and naira devaluation.
Following the devaluation of the Nigerian currency in 2016, the minimum wage in dollar terms dropped to $51 and has since flat-lined between 2016 to 2018. The newly approved new minimum wage of $83 (₦30,000) is a 67% increase on the current $50. Although yet to be implemented, this increment is just a dollar higher than what the average Nigerian earned in 2015 (4 years ago) yet has to compete with double-figure inflation.
VAT, on the other hand, had remained at 5% for over 25 years.In Federal Government’s effort to increase its revenue generation and reduce its revenue to debt service ratio, it has introduced a 50% increase in its VAT to 7.5%.This, at the minimum, is a lazy approach to increase government revenue. According to The Urban-Brookings Tax Policy Center, there are at least three ways to increase government revenues:
While the effort of the government to increase revenue is commendable, it is important that the government shies away from adopting lazy approaches that may further impoverish the citizens and ultimately fail to meet its objectives of revenue increase. As it stands, there is no guarantee that the benefits of increasing VAT will be worth the pain on Nigerians. One implication of the Laffer Curve, a principle that defines the hypothetical relationship between rates of taxation and the resulting levels of government revenue, is that reducing or increasing tax rates beyond a certain point is counter-productive for raising further tax revenue.
One implication of this increase thatis certain, however, is that, despite the 67% increase in minimum wage introduced by the Government (which is yet to be implemented), the average Nigerian will now have to pay 50% higher in terms of VAT on every goods or service he/she consumes.
When this is put in context against the devaluation since 2016 and possible rise in inflation, the already poor average Nigerian would have effectively become poorerand may further worsen our standard of living which according to UNDP is ranked 157 among 189 countries on Human Development Index.
A 50% increase in VAT in a poverty ravished economy, is one classic example of a penny-wise, pound-foolish decision.
Ayo Bankole Akintujoye is a Strategist and Business Transformation Expert with a decade experience working with the some of the world’s largest consulting firms and leading Strategy teams in Nigeria’s financial services industry. He tweets from @AyoBankole.
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