The Manufacturers Association of Nigeria, MAN, has cautioned against the recent recommendation of the Federal Ministry of Finance to the effect that the Value Added Tax, VAT rate be increased by 50 per cent.
The recommendation was ventilated through pronouncement and commentary made on the floor of the Senate by key officials of the Government while defending the Medium-Term Expenditure Framework (MTEF).
MAN, in its position on the issue through Segun Ajayi-Kadir, Director General, of the Association, noted that although this commentary has been denied in a signed statement by Wahab Gbadamosi Director Communication and Servicom the Association however sounded a note of warning that if such commentary is anything to go by, it should be on record that such policy is not manufacturing friendly as the proposed VAT increase appears not to have taken into cognizance the prevailing times and the ongoing Government efforts to re-invigorate the economy.
“As plausible as the recommendation to increase VAT may look, implementing it at this time would boomerang because the timing is inappropriate, especially at a time when the minimum wage of N30,000 was just agreed upon. This could send a wrong signal that the Government is not sensitive to the plight of the low- and middle-income earners, who are clearly in the majority. A typical case of Government simply taking back what was given with the right hand through the National Minimum Wage with the left hand through 50 per cent increase in VAT.” the Association said.
In further advancing its argument, MAN stated that in terms of misery index rating, low per capita income, heavily lopsided income distribution pattern, the Nigerian economy will be in a more vulnerable state if VAT is increased as the burden of the tax would be shifted to the Nigerian consumers that are already struggling, while the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted, many factories will witness serious downturn or wind down operations.
According to MAN, This would also worsen the already high unemployment position of the country which is above 23 per cent as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.
The MAN noted further that as a strategic stakeholder in the nation’s development agenda, it appreciates the need for Government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil but government should thread with caution in the drive for improved revenue.
The Association argued that government should be guided by the fact that the economy just recently exited recession with the fragile growth rate of less than 2 per cent recorded in 2018 and should be delicately managed and the precarious macroeconomic condition of the country requires palliatives that would improve investment and not higher tax burden.
It also said government should know that the prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91 per cent growth rate amidst 2.6 per cent population growth rate that are already cumulatively limiting competitiveness could be further worsened and as such any increase at this time would not be in sync with the standard practice that expects the administration and implementation of VAT to be effected in a manner that distortion and possible adverse effect on the economy are minimized or avoided.
“An increased VAT will spur spontaneous increase in inflation rate occasioned by increased prices of goods and services. The obvious resultant effects of implementing an increased VAT on the manufacturing sector includes lower purchasing power of consumers, sharp reduction in consumption, drop in sales, decrease in production capacity, lower Government revenue, increase in unemployment and stifled economic growth.
Unfair comparison of VAT rate in Nigeria and other countries in Africa forgetting the fact that macroeconomic dynamics and the level of competitiveness in these countries are not the same with that of Nigeria.
The fact that many States of the federation also have other consumption taxes like VAT currently being levied on businesses should call for circumspection.” the Association stated.
It counseled that the principle of a good tax system is predicated on payment convenience, otherwise it could boomerang, leading to crowding out of businesses; more misery to the citizens and even lesser revenue to the Government.
It said that the Nigerian economy has consistently ranked top in Africa with only South Africa presenting a fair challenge.
It is important to state that on economic front, Nigeria should ideally be compared with the emerging economies and not just any country in Africa. Comparative economic policies should be predicated on what obtains in this economic frontier.
Therefore, an ideal tax policy should be such that takes into cognizance the status of the economy. An ideal VAT policy for Nigeria should take into account the current profiles of Nigeria’s Per Capita Income (PCI), National Minimum Wage (NMW); and Global Competitiveness. PCI and NMW will help highlight what will be the implication of upward review of VAT on the already depleted wellbeing of majority of Nigerians, while Global Competitiveness will present insight on the impact of such review on the real sector, particularly manufacturing sector.
The Association however advised Government to widen the tax net rather than increasing the rate to meet the growing need for more revenue to address the development objective of the country and highlighted the need to harmonize taxes/levies/fees payable by businesses in the country so as to attract more investment that would translate to higher productivity and more tax revenue for the Government in the medium and long term.
The MAN maintained that it was wrong for government to contemplate an increase in the VAT at this rather it should consider the implementation of the afore-mentioned tax specific recommendations and continue to ramp-up support for the manufacturing sector in the best interest of the over 200 million population.