In a bid to raise revenues to finance its N10.07 trillion 2020 budget, the Federal Executive Council (FEC) during its meeting yesterday, 11 September 2019, proposed / approved an increase in the nations Value Added Tax (VAT) rate from 5% to 7.2%. The Minister of Finance, Budget and National Planning, Zainab Ahmed, disclosed this while briefing the State House Correspondents after the FEC meeting.
The increase in VAT rate or any other changes in tax regimes should however not take effect until the enabling law has been amended. The Minister therefore confirmed that work has started on the amendment of the VAT Act to enable the new VAT rate take effect from 2020. While this is on-going, the Federal Government will also carry out extensive consultations with the States and Local Governments, as well as other Public and Private stakeholders in the tax system to ensure robust views on the proposed VAT rate.
This is coming on the heels of the newly introduced Police Trust Fund Act, which seeks amongst other revenue sources, to levy an annual charge of 0.005% on the net profits of every company operating business in Nigeria. This Act was signed into law by President Buhari on 2 July 2019. The Act did not define whether the ‘net profits’ is before tax or after tax, neither did it prescribe the mechanism for collection of this tax, but it might be expected that it would be administered through the Federal Inland Revenue Service (FIRS) alongside companies income tax and tertiary education tax.
However with the modus operandi in the Nigerian tax system these days, one would not be surprised to start receiving cold calls/ visits by the Police, just like the Economic and Financial Crimes Commission (EFCC) had been doing in recent times!!! Things may not become this drastic though, considering that the tax amount is not so significant – N50 in every N1million. We will publish a detailed newsletter on this once the modality for administration and payment of this tax is established.
While the government in its discretion, may choose to devise strategies for increasing government revenues, proper accountability and meaningful use of public funds is urgently required.
Nigeria’s VAT rate has been termed ‘one of the lowest in the world’ but little attention is paid to Nigeria’s corporate tax rate of 30%, which is categorised alongside the high income tax rates in the world.
Further, it is common knowledge that the countries which Nigeria might be making reference to as having high VAT rates have an impressive record of keeping to the social contract of providing adequate infrastructure, credits, medicare, education and catering generally to the well being of its citizens with such taxes collected.
The method of imposing and collecting tax revenues in Nigeria also ought to be reviewed so that several multiple taxes can be unified, tax payments can be made easier, more convenient and more friendly. Tax collecting agencies should also be streamlined to avoid continuous harassment of taxpayers, businesses and investors by different agencies all year round.
Lastly, inappropriate and very aggressive methods of tax collection such as placing lien on bank accounts before tax liabilities become final and conclusive by law, and imposing taxes on businesses based on the value of the property wherein they carry on business should be reviewed. Proper and legal tax assessment / administration procedures should be followed instead. Where this proves difficult due to the large number of potential taxpayers in Nigeria vis a vis the manpower capacity of the tax agencies, smart Information Technology tools/ platforms can be deployed to make things easier for both the taxpayers and the tax man.
The consultative approach proposed by the Minister of Finance, Budget and National Planning on the VAT rate increase is a good one, if the method of consultation would be inclusive enough to accommodate majority views of Nigerian tax stakeholders. Seeing that the proposed increase in VAT rate (and the recent Police Trust Fund Levy) are bound to place additional tax payment/ compliance burdens on Nigerian businesses which are already struggling in the face of economic downturn and multiplicity of taxes (and their administrative tediousness), stakeholders are encouraged to loudly add their voices and offer constructive views, opinions and recommendations on how the Nigerian tax system can become more effective.