President Buhari signed in to law the Finance Bill 2019. The highlights of the Bill are
- Increase in the rate of VAT from 5% to 7.5%; a 50% increase. Bear in mind that this still remains one of the lowest VAT rates across the globe.
- 0% Company Income Tax (CIT) for small companies and a lower rate of 20% for medium sized companies.
- Requirement of Tax Identification Number (TIN) to open and operate a business bank account.
- Increase the threshold of online transfers liable to stamp duty of ₦50 from ₦1000 to ₦10000.
- Taxation of foreign entities involved in digital transactions with significant economic presence in Nigeria.
To ordinary Nigerian citizens, the above measures spell doom. Nigerians through various outlets have bristled to the news, expressing their displeasure to the new changes contained in the bill. We may infer that this reaction comes off the back of the lack of in-depth understanding of the Bill stemming from the failure of leading government finance agencies to sensitize a largely uneducated mass before the role out of life changing decisions such as this. Feeling the pulse of the country’s citizens, the reason for this feeling of impending doom stem largely from doomsayers who have heralded the bill as something evil and the masses who generally believe that government is out to gratify itself by further taxing the impoverished masses and the track record of the Nigerian government of not doing enough in recent pasts with taxes generated.
This article will focus on the increased VAT rates, what it does and the implications of its increase from the omnibus bill, that is an all inclusive bill accented in a single vote but packaging together several measures into one. These measures government has argued will bring about ease in doing business for small business ventures as it exempts and reduces tax for some and raise revenue for the government which in turn will reduce the economy’s reliance on oil revenue.
What is Value Added Tax?
A value added tax is a type of tax in which tax is added to the product whenever value has been added at any stage of production. The new finance bill has added the terms “goods” and “services” as part of what may be taxed through VAT to clear ambiguity as to what entities should be taxed. A major argument that has arisen on the back of this is whether or not Shares are to be included due to the language of the Bill which defines “goods” as “all forms of tangible property that are moveable…but does not include securities”. It is inferred from this definition that shares should not be liable to VAT, being a security. However, are shares tangible? On the other hand, “goods” is defined as “any intangible…….asset or property over which a person has ownership or rights…he derives economic benefits…can be transferred…”This could also be interpreted to mean shares would become liable to VAT. If not clarified, this could defeat the purpose of the new Bill being one that seeks to clear ambiguity caused by primary tax laws.
VAT is a very distinct way of taxing consumption goods because it helps government realise its revenue from manufacturers who would have otherwise boycotted remittance in the first place thereby increasing government revenue by reducing federal deficit. How this is possible in Nigeria’s case is yet to be seen considering Nigeria’s government has always experienced a budget deficit at every level as the cost of running government is perpetually high. For every 1-naira government makes, it owes and is expected to spend 1.27 naira; this is because it owes more than it makes. 2019 estimates the government’s revenue at 7 trillion naira and its expenditure plus debit at 8.92 trillion.
In public finance, to increase revenue in a struggling economy, the first thing to do is reduce the cost of running government. Today, our NASS remains revenue consuming. Dissenting opinions on VAT have stated that since the tax is effected across board, government gets to sustain it flamboyant lifestyle, while low earning individuals who live from hand to mouth would spend more on taxes with the VAT system.
What is the implication of the increased VAT rates?
Looking at the implications from an individual’s point of view, your daily life will greatly be affected. The cost of goods and services offered and taxed under VAT system will increase; from electricity bill to mobile data to body lotions. For example as soon as the Bill was signed into law, a popular ice cream outlet in Nigeria, announced almost immediately that a price review will be carried out and new prices on good and services offered will be communicated to the public; also the electricity body PHCN delivered to various households sky-rocketing bills which mirrored the newly increased VAT, bearing in mind that electricity is still epileptic in major parts of the country, which raises the question of what government has being doing with previous VAT deducted while only being able to generate about 4000 megawatts on a daily basis even though it has the potential to generate about 12,522 megawatts from existing plants and excess oil, gas, solar and hydro resources at its disposal. One of the adverse quality Nigeria is known for is its lack of empathy for consumers. Every business outlet is out to maximize profit, therefore all taxes incurred from production to manufacturing stage will be transferred to the final product which the final consumer will be left to bear the brunt of. Invariably, the manufacturer gets his due; cost of production, government gets it taxes thereby increasing its revenue, while you get…well you get the goods or services with increased financial burdens. This is where the bill seeks to cushion the blow delivered by the increased rate by introducing the tax exemptions listed above. Anyone who does not fall within the threshold above would be exempted from registering, remitting, issuing tax invoice and collecting VAT. The threshold of ₦25million within a calendar year will ease the tax compliance burden for small business ventures.
From a financial and taxation law point of view, this is a welcome development. The Bill mirrors tax laws obtained in developed climes; on paper it looks great. The only problem being how will government on its part use these generated revenues to impact the lives of its citizens positively? As seen in other world climes whose tax laws we are trying to adopt. Yes, government should be lauded for lifting taxation burdens off the backs of small companies but where is the eureka for individuals living from pay cheque to pay cheque, who have further been dealt another financial burden? I’d leave that for you to answer.
The proposed Bill is a welcome development in the taxation law of Nigeria. It responds to and seems to remedy the discomfort faced by small companies trying to build businesses within Nigeria’s economy as well as giving foreigners incentives to encourage foreign direct investment; while presenting a medium to boost the economy by these prompts.
Finally, tax authorities and relevant agencies should put in place effective mechanisms to help boost knowledge on the issue which will translate to implementation and compliance. As we know the problem with Nigeria has never been the roll out of legislation but rather the implementation of said legislation.
Article by Ene Omoha Esther (Esq.) email@example.com 08157561204