How 50% VAT increase will help- Nigeria CBN Governor explains

How 50% VAT increase will help- Nigeria CBN Governor explains
September 21 17:08 2019 Print This Article

By Martin Odiete  

Governor of the Central Bank Of Nigeria, Godwin Emefiele has said that implementing increase on the value added tax (VAT) remains the only substantive means of revenue generation for the government to meet up with the rising needs of the citizens as it shies away from further borrowings.

Recently, CBN has endorsed the 50 percent increase in VAT from the current 5 percent to 7.5 percent amid wide concerns on the negative impact the hike could have on consumer purchasing power and the struggling economy. The increase was approved by the government to expand its fiscal revenue base and meet up the increase in minimum wage.

Emefiele who was speaking on the outcome of the 2-day monetary policy meeting in Abuja said, “There are two ways through which government can fund its expenditure, either it raises revenue or it goes for debt,” Emefiele said. “The government has the responsibility to fend for everybody, in fending for everybody means that it has to spend money to provide infrastructure, roads, airports and other things that will improve the lives of the people.”

Emefiele noted that the government has been criticized over its debt service ratio which has remained higher than expected, adding that Nigeria’s VAT rate even at 7.5 percent stands at one of the lowest in the world. “I think VAT would be a better option to raise revenue.”

“Government unfortunately do not have any option,” the apex bank governor said. “If the government must raise revenue, then we think this is one way through which government can raise revenue to meet its obligation.”

According to Emefiele, the VAT increase could be a bitter pill to swallow at the moment, it would lead to a lower debt service ratio and provide the government more revenue to meet its obligation. “It will also have positive implication on the GDP and output of the country.”

Experts have, however, faulted the increase in VAT, saying that it may further worsen the living condition of citizens whose incomes have been stifled over recent years.

Tosan Adewale, an Abuja-based economic analyst, said the introduction of the increase is coming at the wrong time as consumer demand has remained weak, leading to a consistent decline in the performance of consumer goods companies over the past years.

“We discover there has been consistent decline in reported revenue of the consumer goods companies,” Adewale told Businessday. “Introducing this increase may further reduce the revenue base and even drive many out of market.”

He explained that the plan by the federal government to finance the increment in the wage burden through tax increment would force companies to raise prices significantly and ultimately placing the incidence of the tax increment on the consumers.

“Increase in minimum wage to be eroded by price increases of household items, offsetting the expected improvement in purchasing power. The proposed tax policies will further lead to a decline in foreign investments in Nigeria as well as growth of SMEs.”

“We believe companies who are unable to raise prices might lay off workers in a bid to manage costs, further impacting on the level of unemployment,” the analyst said.

Similarly, Eze Onyekpere, lead partner at Centre for Social Justice (CSJ), said that the increase calls for increased fiscal transparency and accountability on the part of government as it manages public resources.

“It is our duty as citizens, as we pay this new increased VAT to demand utmost accountability and transparency from our leaders,” Onyekpere said. “We cannot afford to go to sleep as we have done over the years and expect things to improve.”

Onyekpere stressed that the government’s decision for an increase in Value Added Tax (VAT), which will increase available resources for budget implementation and development across the three tiers of government, may be stiffed by corruption.

“We recall that Nigeria’s tax to gross domestic product (GDP) ratio is one of the lowest in the world and indeed in the West African sub-region. We further recall that Nigeria’s VAT rate is the one of the lowest in the sub-region. We also recall that from our 2018 and 2019 federal government budget analysis.”

“However, the additional revenue to be realized from this increase may not be substantial if the tax authorities do not take concerted and targeted steps to increase the number of natural and artificial persons who will pay the new VAT. The way forward is to ensure that all persons liable to VAT, collect and remit the same to the appropriate authorities,” he said.

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