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Proposed VAT Increase: A case of dismantling the West wall to build the East wall

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The Federal Government said, last week, that it had accepted the proposal to increase the rate of Value Added Tax (VAT) from 5 per cent to 7.2 per cent which will take effect from 2020. Zainab Ahmed, Nigeria’s Finance Minister for Budget & National Planning stated this at the end of the weekly Federal Executive Council (FEC) on Wednesday 11th September, 2019.

For a government that has increasingly financed its fiscal deficit from borrowings, there is no doubt that it needs more innovative approaches to scaling up its revenue capacities to meet its growing funding commitments.

It was against this background that on September 11, the Federal Executive Council agreed to a 44 per cent hike in Value Added Tax, VAT from 5 per cent to 7.2 per cent which will take effect from 2020.

The decision of the Federal Government to undertake this increment was not unexpected as there had been murmurings in government circles on the need for an increase as a veritable way of meeting the expansive fiscal expenditure needs of the Federal Government that have ballooned over the last five years.

The Federal Government is keen on making more money and has decided the people have to pay for it by way of an increase in value added tax. The proposed VAT increase is coming against the background of political and economic uncertainly occasioned by long-standing corruption, poor economic management and exacerbating budgetary financing. – Vanguard

Thus, making it a case of dismantling the west wall to build the east wall or in simpler terms, robbing Peter to pay Paul.

WHAT DOES THIS MEAN?

In practical terms, this means that for every N10,000 transaction you make online with your bank card, the FIRS will charge 5%. This is N500 of the N10,000 purchase, making a total of N10,500 for every purchase you make online.

According to financial experts, higher inflation, interest rate hike, more unemployment and people will generally become poorer. It is basically the masses paying for the maintenance of the country.

How does this affect the online market world?

Babatunde Fowler, FIRS chairman, in a recent interview, had explained that the tax agency is working on ways to tax the burgeoning digital economy in the country. Mr. Fowler said it is difficult to bring the digital economy into the tax net. According to him, “We will address the issue of the digitalized economy very soon. Nigeria has not taken a position yet. But we are meeting to see if we can come up with a global solution that we can all adapt to.”

There are no laws that makes the increased VAT apply to the online marketing world, hence they are currently exempt from the effect of this new VAT rate.

Reactions trailing the increase

Nigerians have kicked against the proposed 5% value-added tax on all online purchases from next year. Nigerians decried that the policy is anti-people, saying it will amount to double taxation. Many believed most of the items sold on e-commerce, for instance, are tax inclusive and extra 5% for card purchase online will amount to extortion.

Akin Alabi, a Nigerian businessman, and a lawmaker said the government should come up with policies and actions that will support the digital space and not taxing them out of business.

The tech industry is one of the few bright lights in Nigeria in the last 10 years or so. “Our government (states and federal) must come up with policies and actions that will aid and support them to grow, not just taxing them. It’s not hard to help them.”

“Of what use is the cashless policy of the Central Bank if the government is trying is heavily levied tax burden on the digital economy,” another social media user said.

Various groups like Action Aid Nigeria, Centre for Democracy and Development, among others have also warned against the implementation of this policy to avoid increasing poverty level and economic inequality among the people.

Proffered solution

Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring a robust administration rather than by increasing rate. This should include a review of VAT waivers, better policing of the border to improve, import VAT collection, framework for VAT on imported services and digital economy.

Contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality. In any case the likely increase in revenue will not be sufficient to pay the minimum wage.