Nigerians believe VAT hike will worsen inflation – Survey

Some Nigerians have expressed concerns that the proposed hike in Value Added Tax from 7.5 per cent to 15 per cent by 2027 would worsen the country’s inflationary trend.

This was the outcome of a survey carried out by Africa-focused data and intelligence firm SB Morgen, which was published on Thursday.

The study conducted in Abuja, Anambra, Bauchi, Cross River, Kano, Lagos, Oyo, and Rivers states sought to have a response from each geopolitical zone and explored respondent knowledge of the tax reform bills, their views on the public outcry and opposition from Northern politicians, the perceived urgency of passing the bills, and the anticipated impact on their businesses.

The National Assembly recently suspended legislative action on the controversial Tax Reform Bills, which include the Nigerian Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, the Nigeria Tax Bill, and the Joint Revenue Board Establishment Bill.

The outcome of the study revealed that most respondents were aware of the proposed reforms and generally viewed them favourably, particularly regarding the potential benefits for their businesses.

“However, a significant concern was raised regarding the gradual increase of the Value Added Tax rate from 7.5 per cent to 15 per cent by 2027. Respondents feared this tax hike could exacerbate inflationary pressures. Some respondents also recognised that the Tax Reform Bills could incentivise states, particularly in the North, to enhance their revenue generation capabilities, fostering greater industrial competitiveness. Respondents agreed that the Bills should be passed promptly, provided that contentious clauses and issues related to the VAT revenue-sharing formula are adequately addressed.

 “Furthermore, respondents emphasised the critical need for increased public engagement, awareness, and education regarding the Tax Reform Bills. They suggested that this outreach effort should be conducted across various media channels, including the use of local dialects, to effectively communicate the potential benefits and drawbacks of the proposed reforms,” part of the report read.

These concerns about the impact of the VAT on inflation are contrary to those of the chairman of the Presidential Tax Policy and Fiscal Reforms, Taiwo Oyedele, who recently said that VAT reforms would slow inflation. He argued that the proposed reform policies aimed at overhauling Nigeria’s tax system would bring the needed relief for the citizens impacted by economic hardship.

One of the respondents, Yakubi Samaila from Bauchi State, said, “I think the bills have the prospects to stimulate the economy if rightfully implemented. This bill tends to push states to work for their revenue and create reasonably competitive industries. Increasing VAT and income tax for any income class without fixing the economy will only further impoverish already struggling Nigerians.”

An Abuja-based civil servant and hair vendor, Judith Asogwa, highlighted that the present tax system imposes multiple taxes on businesses regardless of their size. “I believe this proposal to merge various tax laws into a single act will simplify the tax system, making it less complex and easier to manage and understand. For example, the Federal Inland Revenue Service becoming NRS will help reduce some existing confusion for taxpayers as they won’t have to deal with different agencies for different taxes. I don’t see the reason for the North’s outcry. The reform bills will force them to work hard on improving their IGR because they are becoming too comfortable with government allocations and the quota system.”

A point-of-sale agent in Onitsha, Chibuzor Igbokwe, said, “It will encourage economic diversification and improve tax administration, but I am scared that it could spike the charges for my small business. The charges are high, leaving little support for my business and other small businesses.”

Meanwhile, a former Director-General of the Lagos Chamber of Commerce and Industry, Muda Yusuf, said many sections of the Tax Reform Bills are quite technical, making them unintelligible for many average Nigerians.

“The Nigerian economy is highly informal. The man in Alaba who makes over N100 million does not know what is called Company Income Tax and may not even have an audited account. The reduction of CITA from 30 per cent to 25 per cent is a welcomed idea. However, the increase in VAT from 7.5 per cent to 10 per cent is a bad idea,” he said.

Yusuf also decried the proposed scrapping of the Tertiary Education Trust Fund, saying that the fund has been creating most of the development across universities.

“If it is scrapped and schools are told to go through the budget process, many universities will not receive similar funding and support due to bureaucratic hurdles. The government is moving towards complete commercialisation of the university system in Nigeria. It is not fair to the poor masses. All the politicians benefitted from the education subsidies,” he asserted.

In the report, titled, ‘Much ado about taxes: No taxation without representation”? Or “Oppressive and unfair taxes?’, SBM argued that with the suspension of legislative action on the bill by the Senate, “Clear and decisive action is now required from political authorities, including the presidency and the coordinating minister of the economy, to get the consultations through. They must actively support the consultations and bolster Mr. (Taiwo) Oyedele’s efforts to refine the Bills and ensure it is successfully passed.”

On Wednesday, Oyedele, in response to the expression of support for the tax Bills by the Revenue Mobilisation Allocation and Fiscal Commission and the RMAFC’s position on the proposed VAT sharing formula, warned that states would be affected economically should Lagos and Rivers States win their pending case at the Supreme Court.

“The proposed VAT revenue-sharing formula in the tax bills, along with the other VAT reform proposals, are meant to address key issues that are existential to the VAT regime as currently operated. There is a pending case by Rivers and Lagos States seeking to administer VAT as a state tax given the perceived inequity in the current distribution formula. In addition to the perceived unfairness of the distribution formula, the current derivation model is skewed in favour of head office locations, which mainly benefit Lagos and Rivers States.

 “If the case, which is pending at the Supreme Court, succeeds, states will lose the opportunity to share VAT revenue among themselves, as any revenue generated by each state will be retained 100 per cent, i.e., 100 per cent derivation model.

“Import and international VAT will become the sole revenue of the federal government, along with FCT VAT, which altogether accounts for more than 50 per cent of the current VAT revenue compared to the 15 per cent being shared by the federal government that is proposed to be reduced to 10 per cent under the tax bills in favour of states. Moving away from the central collection of VAT will not only lead to a significant revenue loss of over 50 per cent for all the states, but they will also face challenges in collecting VAT as evidenced by the old sales tax regime administered by states and the consumption tax being collected currently by some states.

“This will make states and local governments vulnerable and further increase subnational fiscal risks with the attendant economic and social consequences. There will also be challenges to commerce and interstate trade in addition to the cascading effect on inflation,” Oyedele stated via his X handle.