THE POSITION OF THE MANUFACTURERS ASSOCIATION OF NIGERIA (MAN) ON THE REPORTED POSSIBLE INCREASE IN VALUE ADDED TAX (VAT) RATE BY THE FEDERAL GOVERNMENT OF NIGERIA

 

THE POSITION OF THE MANUFACTURERS ASSOCIATION OF NIGERIA (MAN) ON THE REPORTED POSSIBLE INCREASE IN VALUE ADDED TAX (VAT) RATE BY THE FEDERAL GOVERNMENT OF NIGERIA

1.0 Preamble

The attention of the Manufacturers Association of Nigeria has been drawn to news report on the recent recommendation of the Federal Ministry of Finance to the effect that the VAT rate be increased by 50%. According to reports, this recommendation was ventilated through pronouncement and commentary made on the floor of the Senate by key officials of the Government while defending the Medium-Term Expenditure Framework (MTEF). Although, this commentary has been denied in a signed statement by Wahab Gbadamosi Director Communication and Servicom as published in some National dallies, the Association still wishes to warn that if such commentary is anything to go by, it should be on record that such policy  is not manufacturing friendly as the proposed VAT increase appears not to have taken into cognizance the prevailing times and the ongoing Government efforts to re-invigorate the economy.

As plausible as the recommendation to increase VAT may look, implementing it at this time would boomerang because the timing is inappropriate, especially at a time when the minimum wage of N30,000 was just agreed upon. This could send a wrong signal that the Government is not sensitive to the plight of the low- and middle-income earners, who are clearly in the majority. A typical case of Government simply taking back what was given with the right hand through the National Minimum Wage with the left hand through 50% increase in VAT.

 

2.0 Economic Realities of the Proposed Increase in VAT

In terms of misery index rating, low per capita income, heavily lopsided income distribution pattern, the Nigerian economy will be in a more vulnerable state if VAT is increased. No controversy, the burden of the tax would be shifted to the Nigerian consumers that are already struggling, the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted, many factories will witness serious downturn or wind down operations.

This would also worsen the already high unemployment position of the country which is above 23% as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.

 

3.0 Our Concerns

MAN as a strategic stakeholder in the nation’s development agenda, appreciates the need for Government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil. However, Government should thread with caution in the drive for improved revenue for the following reasons

  • The economy just recently exited recession with the fragile growth rate of less than 2% recorded in 2018 and should be delicately managed.
  • The precarious macroeconomic condition of the country requires palliatives that would improve investment and not higher tax burden
  • The prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91% growth rate amidst 2.6% population growth rate that are already cumulatively limiting competitiveness could be further worsened.
  • Any increase at this time would not be in sync with the standard practice that expects the administration and implementation of VAT to be effected in a manner that distortion and possible adverse effect on the economy are minimized or avoided.
  •  
  • The obvious resultant effects of implementing an increased VAT on the manufacturing sector includes lower purchasing power of consumers, sharp reduction in consumption, drop in sales, decrease in production capacity, lower Government revenue, increase in unemployment and stifled economic growth.
  • Unfair comparison of VAT rate in Nigeria and other countries in Africa forgetting the fact that macroeconomic dynamics and the level of competitiveness in these countries are not the same with that of Nigeria.
  • The fact that many States of the federation also have other consumption taxes like VAT currently being levied on businesses should call for circumspection.

 

 4.0 Standard Considerations for an Ideal VAT Rate for Nigeria: Comparative Enquiry

There is no doubt that VAT is an important revenue source to the Government for running the affairs of the country. 

However, the principle of a good tax system is predicated on payment convenience, otherwise it could boomerang, leading to crowding out of businesses; more misery to the citizens and even lesser revenue to the Government. The Nigerian economy has consistently ranked top in Africa with only South Africa presenting a fair challenge.   Years back, following the economic feat   and potential of the country, it assumed an emerging economy status like China, India, Malaysia, Turkey and South Korea.  Only South Africa and Egypt made this economic bracket in Africa.

It is important to state that on economic front, Nigeria should ideally be compared with the emerging economies and not just any country in Africa.   Comparative economic policies should be predicated on what obtains in this economic frontier.  

Therefore, an ideal tax policy should be such that takes into cognizance the status of the economy. An ideal VAT policy for Nigeria should take into account the current profiles of Nigeria’s Per Capita Income (PCI), National Minimum Wage (NMW); and Global Competitiveness. PCI and NMW will help highlight what will be the implication of upward review of VAT on the already depleted wellbeing of majority of Nigerians, while Global Competitiveness will present insight on the impact of such review on the real sector, particularly manufacturing sector.

A cross-reference of selected emerging economies in terms of PCI, NMW and GCI in the table below is revealing.

 

VAT (%)

Per Capita

 Income (USD)

National Minimum Wage (USD)

Global Competitiveness Ranking

Nigeria

5

2,412.41

About 85

115

Turkey

18

10,862.00

370.44

62

Malaysia

6

10,783.00

350.00

25

China

3

10,099.00

225.00

28

South Africa

15

6,560.00

245.00

67

 

From the cross-country indicators computed from the World Bank Report, it is quite discernable why VAT is high in these emerging economies including South Africa. 

The high PCI and National Minimum Wage   are able to adequately offset the impact of high VAT on growth and wellbeing of the populace, while the high Global Competitiveness ensures that the countries secure a fair share of global market – recently, Nigerian has been recording influx of businesses from South Africa.  Conversely, given the low Nigeria’s PCI, NMW and Global competitiveness any increase in VAT at this time, will further depress consumption, industrial production and wellbeing of Nigerians.

 

5.0 Our Position

In MAN’s previous position and recommendations, the Association advised Government to widen the tax net rather than increasing the rate to meet the growing need for more revenue to address the development objective of the country. There is also the need to harmonize taxes/levies/fees payable by businesses in the country so as to attract more investment that would translate to higher productivity and more tax revenue for the Government in the medium and long term.

6.0 Conclusion

In consideration of all the above, MAN hereby implore Government not to increase the VAT at this point in time but consider the implementation of the afore-mentioned tax specific recommendations and continue to ramp-up support for the manufacturing sector in the best interest of the over 200million Nigeria.

Segun Ajayi-Kadir

Director General