There is no other way to put it, our normally impressive Vice President, Prof. Yemi Osinbajo is very wrong on his position on the Value Added Tax (VAT) which he considers as rather low and therefore plans to increase.
The VP’s position is not new. I suspect it resonates with a number of people in government and that is scary. On the surface and in theory, they may have a point which the VP articulated in Lagos last week at the National Forum on the economy organised by a Lagos based publisher.
According to the VP, the dependence on oil generated revenue has crippled the country’s ability to produce alternative funds and has turned our three tiers of government into addicts of sharing oil money. In other words, the government and Nigeria consequently needs to find other means of generating revenue.
So far so good but then comes where the VP gets it wrong for in his view and I suspect the whole government’s view is that the way to generate this non oil related funds is to tax Nigerians. The VP went on to project that non-oil sources such as Company Income Tax, VAT and Customs and Excise charges will generate N1.5tn instead of the N820bn expected from the oil sector.
No Mr VP, as you teach us, there is a season for everything. The first error is that of timing. In the main streets of Nigeria, this is not a time of abundance. It is not a time people are spending recklessly and robbing the government of its due in taxes. Rather, people are coping with very little income and very high expenses aggravated by direct infrastructural and financial costs for businesses and families.
Direct infrastructural costs here will include anything the state provides elsewhere but individuals have to provide in Nigeria such as power, private security, water, health and education. Direct financial cost now will include extra costs induced by the practical slouch of the naira in addition to the borrowing and lending at double digits.
Generally an increase in taxes tends to mean increase in prices, which by nature tends to curb spending. The VAT by definition and in essence is a tax on consumers. So when we increase VAT we should expect consumers to pay more. In other systems VAT and other duties are specifically used to curb consumption of items such as cigarettes and alcohol. The idea is that if prices of these items go up then smokers and drinkers will buy less.
The general increase in taxes as threatened by the current administration in Nigeria today will simply make people rethink on their spending. They will buy less and worse still push the financially weaker segments of the society towards substandard goods and services. We need to factor in this possibility because we know how our people tend to ‘manage’.
Businesses already struggling know they cannot easily transfer any increase to their customers so they will find a way to absorb it. That in the end might even render efforts of the government a waste with the only result of creating hardship.
There is also a moral issue here. The government in its various arms has not exactly starred as an example of taxing itself and sacrificing a lot. Let’s be clear, populist as it may sound to some urbane observers, the government does need to earn the moral right to ask people for sacrifices. We are hoping and praying for a great budget but so far the talk of dressing allowance for the national assembly members and the talk of building new houses for government officials as if they are homeless is quite nauseating for some of us and indeed provocative for many Nigerians.
Yes, the government needs money to build roads, improve the health and education system and maybe one day fix electricity supply. These are certainly laudable and needed projects that will also create jobs and wealth for the country. To embark on such projects however let the government reason outside the box as well.
Perhaps, like every organisation that needs to raise funds for projects, the government can start by cutting its expenses, sell some of its assets in a transparent and effective manner, then move on to borrowing and then unto partnership with private entities that will invest in projects.
The VP is right when he points out the need to increase the taxpayer base but that will happen only after people actually have jobs and they are capable of spending. How can we expect an employee who is already underpaid when lucky or even owed salary when unlucky to pay more tax or VAT through an increase in prices?
Ordinarily one would suggest that the Government could also maybe start from ensuring the effective collection of the existing rates. For there are a lot of companies and individuals celebrated as the biggest or the richest but are not known to be the biggest taxpayers.
This is however not the time to focus on taxes or to increase interest rates. We are in a season of economic contraction and the least the Government can do is to help boost the system not add to contracting it any further and painfully.
It appears the idea of increasing taxes is popular with those near the corridors of power in Nigeria today, but let those that can consider issues profoundly do so and perhaps be bold enough to have a rethink. There are other ways we can generate funds. We all need to diversify. Increasing taxes is as bad as depending on oil revenue.
Join me if you can @anthonykila to continue these conversations.