In 2016 the government will face increasing pressures to increase the country’s revenues. One of the options available to achieve this is by increasing the tax receipts.
Value Added Tax (VAT) is widely acknowledged to be one of the most cost-effective tax revenue-raising tools in the hands of any government.
In 2015 the Federal Inland Revenue Service (“FIRS”) launched a programme aimed at increasing the VAT receipts by improving the overall compliance and management of VAT. The FIRS’ objectives of increasing VAT revenue can be achieved by government adopting a number of measures including the ones outlined below.
VAT rate rise
At its inception in Nigeria in 1993 the VAT rate was set at 5 percent and has remained thus up until today. There is little doubt that Nigeria’s VAT rate is currently one of the lowest in the world. So, a rate rise would be an obvious way to increase the VAT receipts. Nigeria’s VAT rate is currently too low and a rise is inevitable, however, the decision should not be a knee-jerk one, but be calculated and well thought with due consideration given to the impact such a rise could have on the wider economy, e.g., the impact on inflation, the impact on household budgets and the impact on the nation’s economic growth.
Widen the VAT net
Widening the VAT net would undoubtedly increase the VAT receipts. It is well-documented that VAT avoidance/evasion in Nigeria is rife. This puts compliant taxpayers at a distinct commercial disadvantage to their non-compliant competitors.
FIRS by exercising its enforcement powers should seek to widen the VAT net and create an environment where compliant businesses can thrive and non-compliant businesses are prevented from benefitting from their evasion of taxes.
The VAT legislation
The VAT legislation is in urgent need of updating. It currently lacks the structure, definition and depth required to counter modern-day VAT issues. In its current form it is open to misinterpretation, manipulation and abuse.
An update of the legislation should seek to reduce the risk of double taxation or non-taxation of transactions and address various lacunas and deficiencies in the law. It should also provide clarification on a number of topical issues such as place of supply rules, electronically supplied services consumed in Nigeria, supplies made in Nigeria by non-established persons, VAT exemptions, businesses making both exempt and taxable supplies, intercompany transactions, general anti-avoidance, to mention a few.
Administration of VAT
In order for FIRS to maximise the collection and management of VAT, it should also consider implementing the following initiatives:
(i) Improved use of technology
FIRS should invest in technology which would allow it to gather and maintain a wealth of information required to monitor the tax position of businesses in Nigeria. This should make it easier to identify risk and make the most efficient use of its available resources by adopting an intelligence-based and risk-led approach to auditing VAT declarations.
(ii) Introduction of a VAT registration threshold
Under VAT law all businesses making non-exempt supplies are required to register, charge and account for VAT to FIRS. FIRS is responsible for the collection and management of VAT. The existence of a large informal unregulated economy in Nigeria makes this responsibility an arduous task and reduces the cost-effectiveness of collecting VAT. This position could be improved by introducing a VAT threshold, below which businesses would not be required to register and account for VAT, allowing FIRS to focus its resources more effectively.
The role of FIRS
FIRS’ performance over the next few years will be crucial. It is difficult to criticise FIRS as an institution without having full appreciation of the challenges it faces, both internally and externally. The organisation requires firm and insightful leadership to combat VAT avoidance/evasion and ultimately increase the VAT receipts on a consistent basis. It must also be ready to make tough internal decisions such as weeding out any bad eggs within the organisation.
The initial signs coming from the leadership of the FIRS under the new administration are very positive. There appears to be a renewed vigour aimed at tackling tax avoidance and increasing the current level of tax receipts. This is encouraging, as the success of FIRS is an important component in putting Nigeria firmly on the path to economic stability.
Ola Adigun
