Sunday, 24 March 2019

Proposed VAT Hike: Labour Warns Against Plan, Vows To Resist It

When President Muhammadu Buhari recently urged Nigerians to fasten their belt in readiness for a bumpy ride in his second tenure, grappling with the concomitant effects of a 35-50 per cent review of the Value Added Tax (VAT), in an economy that is still nursing the aches of recession, was never envisaged.

It was the Minister of Budget and National Planning, Udoma Udo Udoma and the Executive Chairman, Federal Inland Revenue Service (FIRS), Mr Tunde Fowler that dropped the bombshell last week when they appeared before the Senate Committee on Finance.

The proposal, which increases VAT from the current five per cent to either 6.75 per cent (35%) or 7.25 per cent (50%) according to them, is to enable the Federal Government pay the newly-approved N30,000 minimum wage. Their proposal has elicited divergent reactions from the organized private sector, the labour unions and economic experts.

According to the Director-General of the National Bureau of Statistics, Yemi Kale, Nigeria earned N3.67 trillion from VAT between 2015 and 2018. The breakdown shows that N767 billion was collected in 2015; N828 billion in 2016; N972 billion in 2017 and N1.1 trillion in 2018. In 2018, total tax collected stood at a record breaking N5.3 trillion without recourse to hiking any class of tax.

Workers and Nigerians in general have vehemently condemned the decision to increase VAT, as there are insufficient infrastructure and social services to show for taxes collected in the country. From bad roads, epileptic power supply to lack of good public medical services, Nigerians have had to endure these blights or seek alternative arrangements at their own expenses, despite paying taxes.

Although the FIRS chairman has quickly denied plans to increase VAT following public outrage, economic experts doubt the sincerity of the government to truly jettison the plan because there seems to be no clear-cut alternative arrangement to pool funds to pay the new minimum wage; other than increasing the tax rates or resorting to borrowing.

Already the euphoria among workers over the passage of the N30,000 minimum wage by the Senate last week may have been muffled by the proposal for the Federal Government to increase VAT to enable it implement the new wage.

The news has angered the Organised Labour and the Organised Private Sector (OPS), who warned of the dire consequences that may result from the action should the government go ahead with it.

The Organised Labour sees it as insincerity on the part of the government to pay the new wage by using VAT as a trump card, pointing out that the hike in VAT would further impoverish the workers as they would have to pay more for goods and services without a commensurable income.

Therefore, labour has vowed to resist the implementation of the proposal, while members of the OPS warned that it would further compound the problem of the fragile economy.

The Nigeria Labour Congress (NLC) pointed out that the increase in VAT would be counter-productive, arguing that the proposed new wage is quite minimal to have warranted any tax increase.

The Vice President of the NLC, Comrade Peters Adeyemi, warned that government should not contemplate increasing VAT or else it would meet with the wrath of the workers.

Adeyemi, who said no sensible labour leader would support the government plan warned that it is something that should not happen as it would rubbish the gesture of the minimum wage.

“Government cannot increase VAT, this is because it is the workers that will suffer and what is the percentage increase on the wage anyway compared to the inflation in the country. Government should not contemplate it at all,” he said.

Sharing the same view with the NLC, the Trade Union Congress (TUC) said that it would not support the government plan to increase VAT to pay the new wage as it has no bearing with workers’ demands.

The President of TUC, Bobboi Bala Kaigama, said that the government should rather put on its caps and think of other ways of raising funds for the payment of the new minimum wage of N30,000.

“Less than 50 per cent of the corporate organisations are paying tax. FIRS should go out and tax the rich and ensure that all are paying tax.

“VAT is all about everybody, OPS just have to collect and pay to government, which doesn’t add more to them. People bearing the brunt are the lower class, which are the workers.

“We believe that all companies, most especially those who are not captured presently should be put in the tax net to pay appropriately. Mind you, this minimum wage we are talking about only involves workers in the public sector, as private sector are already paying more. So, we wondered why government is making so much noise about payment.

“Right now, we don’t want to doubt government sincerity, we will wait for the National Assembly to harmonise the bill, the president to sign it into law, after that if there is any delay in payment, when we get to that river, we will cross it,” he said.

The United Labour Congress (ULC) President, Joe Ajaero also warned that the government cannot use the VAT excuse to implement the new minimum wage as it was never raised nor given as a condition at the Tripartite Committee where the new wage of N30,000 was recommended.

He reasoned that as workers would not be exempted from paying the proposed increased VAT, it would amount to giving them the money with a right hand and taking it back with the left through VAT.

“It will also be detrimental to the employers, which would be double payments, paying workers increased salary and paying government exorbitant amount in VAT. It is not going to augur well for the workers and neither the economy”, he said.

The President of the Association of Senior Staff of Banks Insurance and Financial Institutions (ASSBIFI), Comrade Oyinkan Olasanoye, also expressed that there was no correlation between implementing the new minimum wage and the proposed increase in VAT.

She stated that government must have been planning the VAT increase and now hiding under the new minimum wage to carry out its plan.

“Increasing the VAT should not and must never be condition to implement the new wage. The only thing we can deduce from this is that government doesn’t want to pay the new wage and now using the VAT as an excuse”, she said.

Organised Private Sector

For the members of the Organised Private Sector (OPS) said that the move would put more burden on businesses in the country.

The Manufacturers Association of Nigeria (MAN) said that the recent proposal by the Federal Ministry of Finance to hike VAT rate was 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.

The Director General of MAN, Segun Ajayi-Kadir, recalled that the 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).

He, however, noted that although the commentary has been denied in a signed statement by Wahab Gbadamosi, Director Communication and Servicom as published in some national dallies, MAN still believes that 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.

According to the Director General, 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, stating that it would be 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 increase in VAT.

On the economic implications, Ajayi-Kadir explained that 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 per cent 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,” he said.

Also, the Director General of Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said that such plan would not be good for business as investors presently are operating in a very difficult environment with high cost of production.

“This is coupled with the fact that the purchasing power of consumers has further been worsened”, he said.

According to Yusuf, the entrepreneurs operating at the Medium and Small Scale levels may not be able to survive the onslaught.

In the same vein, the Director General of Nigeria Employers Consultative Association (NECA), Mr Timothy Olawale, lamented that multiple taxation is already killing businesses in the country, adding that increasing the VAT would amount to compounding the problem of the OPS members.

“Businesses in Nigeria are encumbered with the payment of over 55 different taxes at the three levels of government. The incidence of double taxation, particularly consumption tax, has assumed a very dangerous dimension. We expect the government to rein in through an appropriate statutory or policy declaration.

“Government should not make mistakes of generating revenue through tax increase. We know that government will want to meet up with its revenue requirement. If you increase tax, it will increase cost of goods and services and it is the consumers that will suffer for it. You don’t make people poorer by adding to their burden. So government must be very careful when it says that it want to generate more revenue internally.

“Rather than increase the tax, I think what government should do is to widen the tax gap between the rich and the poor or average Nigerian. Some companies and well-to-do individuals are not paying tax. Government should also focus on luxurious goods, most especially foreign goods that we can do away with. But government should not tax those goods that has direct effect on the common man,” he suggested.

However, the NECA Director General promised that all members of the organized private sector would implement the new N30,000 minimum wage.

“There is no reason all members of the organized private sector should not be able to pay N30,000 minimum wage. This is because they (Organised Private sector) all agreed after due consultation”, he said.

He noted that over 70 per cent of the OPS members are already paying way above N30,000 as minimum wage, adding that the consequential impact is very minimal, if not nil, because it is supposed to affect the chain or review, where the benchmark is below N30,000.

Looking at other options open to pay the new minimum wage, finance analysts ruled out the borrowing option on grounds that Nigeria’s current debt profile stands at over N22.7 trillion, saying adding to that staggering figure would likely box the country into a debt trap.

“The country is broke. Where else will government get money to run the country other than raising taxes? That is the only way to raise money to pay the N30,000 minimum wage even it is coming with scathing consequences. We’ve not expanded our tax base well enough.

“So, we’re broke and that’s the truth. For every 100 kobo Nigeria makes, 68 kobo is used in paying back our loans. Should we then borrow more?

“All the real revenue we generate, 68 per cent of it goes into loan repayment”, an Economic Analyst and Coordinator, Centre for Social Justice, Mr Eze Onyekpere, told Sunday Sun.

Commenting on the development, Nigeria’s first Professor of Capital Market and Head, Banking & Finance department, Nasarawa State University Keffi, Prof Uche Uwaleke told Sunday Sun that the idea of increasing VAT to fund the new minimum wage remains a counter-productive move.

According to him, past experience has shown that a new minimum wage will not necessarily lead to higher inflation as being suggested in some quarters.

He buttressed his assertion with a 2011 scenario, when the wage floor was increased from N7,500 to N18,000 and average inflation rate actually dropped from 13.7 per cent the previous year to 10.8 per cent.

Uwaleke said if a new minimum wage can only be implemented by increasing taxes, then it simply amounts to digging a hole to fill a new one; as the associated hike in the cost of goods and services will erode the purchasing power of any increase in wages.

“There is no doubt that the current VAT rate of five per cent is among the least in the world. However, it is equally true that many countries with a higher VAT rate have lower corporation tax. Ghana, for example, has a higher VAT rate of 12.5 per cent, but a lower Company Income Tax (CIT) of 25 per cent compared to Nigeria’s 30 per cent. Ditto for Egypt with a lower CIT of 24 per cent. “Therefore, any increase in VAT can be productive only if it is part of a broad fiscal strategy of rebalancing the tax mix in favour of consumption tax which will entail also lowering the company income tax.

“Doing otherwise in an economy that is grappling with double-digit inflation, weak growth and high unemployment rate will cause more distortions and jeopardize government’s efforts at revamping the economy”, Uwaleke explained.

He added that various reports by the National Bureau of Statistics have shown that inflation in the country is driven more by cost-push factors than demand-pull against the backdrop of weak aggregate demand.

“Therefore, if the VAT rate is increased without a corresponding reduction in CIT, it will further increase the cost of goods and services and worsen inflationary pressure.

“The CBN will be compelled to further tighten monetary policy resulting in high cost of funds for businesses. Many firms, especially those producing items with elastic demand, will experience reduced sales as they may not be able to easily transfer it to their customers. “This will lead to inventory accumulation, low capacity utilization, lower profits and downsizing of workers thereby complicating the unemployment challenge in the country. Moreover, reduced profits for companies quoted on the stock exchange will bring about reduced investments by these firms and depressed stock prices. In fact, an increase in VAT will lead to an increase in the cost of transactions in the capital market making it less attractive to investors”, he noted.

Rather than hike VAT, the don urged the government to address the perennial systemic challenge of low and inefficient tax collection.

According to him, a good number of taxpayers who are supposed to be remitting VAT to the government do not do so.

While throwing his weight behind the new minimum wage without recourse to borrowing, he implored the government to devise means of improving the collection efficiency as well as widening the tax base as many eligible taxpayers are still outside the tax net.

Data from the Finance Ministry indicates that Nigeria with a population of over 180 million people has 120 million adults.

Out of that figure, only 10 million Nigerians were paying taxes as at 2015. The number has grown to 14 million today, a figure that is still a far cry from about 60 million adults that are taxable.

The Ministry has also identified over 80,000 high net worth Nigerians that are either outside the tax net or paying inappropriate taxes.

More so, data from Ministry of Industry, Trade and Investment shows there are 37.7 million Micro Medium and Small Enterprises (MSMEs) in Nigeria as at 2016.

Out of that figure, which has grown to about N40 million in 2019, the Central Bank of Nigeria (CBN) has captured 17.5 million of them in its National Collateral Registry (NCR).

However, experts say most of the players in the MSME space do not pay the right taxes. This is aside the fact that the bulk of them do not pay taxes at all because they are in the informal sector (unregistered) and operating in the hinterlands where tax officials cannot easily access.

A Chartered Accountant, Ifeanyi Martins Onubah has urged the government to go after this category of tax evaders, while working assiduously at broadening the tax base in the formal sector.

“We are talking about 40 million MSMEs. Why can’t the government work hard and identify them and levy them at flat rate? I mean those retailers selling various wares in the open section of the markets, along the streets and all that. They do not have shops. They sell daily. You can levy them N200 monthly flat rate. Multiply that by say 20 million of them. That’s N4 billion monthly. It is something we’re losing currently on a conservative estimate by not capturing them at all,” he said.

Jaye Gaskiya, the Convener, Take Back Nigeria Movement picked holes in government’s argument that VAT in Nigeria is the lowest compared to other African nations.

“Saying VAT in Nigeria is the lowest isn’t the issue. The fact is that we have a struggling and recovering economy and Nigerians have low disposable income. That needs to be addressed.

“States have to work out how to raise their IGR. Let them invest in productive ventures and from there boost their revenue generation”, he said.

The Head of Tax and Corporate Advisory Services at PwC Nigeria, Mr. Taiwo Oyedele, lamented that governments sometimes have a lazy approach to tackling problems without caring to know the impact on the citizenry.

Oyedele said increasing VAT to enable government pay the N30,000 minimum wage in face of unemployment, fragile economic growth and low purchasing would be counter-productive. He maintained that, if the government is compelled to increase the minimum wage, then it should be looking at ways of improving efficiency and productivity.

The tax expert warned that increasing VAT could lead to a decline in collection rate because the majority of the people that are meant to be paying the current VAT rate are not even paying, adding that a further hike will discourage them further.

On how to arrive at a sustainable model of paying the minimum wage, Oyedele advocated streamlining of job roles and a performance measurement framework across all MDAs appraisal model that would help shrink job roles.

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