The federal government’s move to tax the informal sector could worsen the burden of small business owners and heighten poverty and hardships facing Nigerians, economic experts have said.
The federal government, through the Federal Inland Revenue Service (FIRS), recently disclosed plans to implement the VAT Direct Initiative, which is aimed at enabling the government to collect Value Added Taxes from the informal sector and reduce multiple taxation in the informal economy.
According to the FIRS, the new tax is aimed at boosting revenue generation for the three tiers of government, which in turn means more money to fund infrastructure and social amenities.
Experts who spoke with BusinessDay faulted the plan on the basis that it would increase the burden of the small business owners who are already paying several levies to local governments and several non-state actors.
Uche Uwaleke, Professor of Finance & Capital Market at Nasarawa State University, said even though the initiative is a welcome development as it will result in more revenue for the government, it is coming at the wrong time.
For him, the implementation of the initiative a time when the cost of energy is rising astronomically will only feed into galloping inflation as traders and service providers pass on the VAT charges to final consumers of goods and services who end up bearing the burden.
He said: “’I think the VAT Direct initiative involving the informal sector is meant to widen the VAT base. Ordinarily, this should be a welcome development as it will result in more revenue for the three tiers of government but the major snag I see with this initiative is the timing.
‘’The government has yet to sort out the challenge of multiple levies that small businesses face. This may lead to low demand and patronage of services offered by the informal sector, which in turn can bring about business failures and job losses.’’
Uwaleke highlighted the issue of its practicality as most businesses in the informal sector are micro businesses with little or no accounting records.
‘’So, I would advise the FIRS to postpone the implementation until the economic conditions improve especially availability of affordable electricity and fuel. Let’s not forget that the informal sector in Nigeria constitutes more than 50 percent of the nation’s gross domestic product (GDP),’’ he said.
BusinessDay’s analysis of the 2020 MSMEs survey jointly conducted by the National Bureau of Statistics and Small and Medium Enterprise Development Agency of Nigeria showed that of 39,654,385 MSMEs in Nigeria, 34,413,420 operate informally.
Speaking with BusinessDay, a trader who sells baby products at the Lugbe-Berger market, Madam Faith, decried the proposed tax by FIRS, stating that business activities were no longer as lucrative as before.
She said the business environment in the country has been tough and complained about the several other payments she makes monthly, including electricity bills, and levy collections by the Abuja Municipal Area Council (AMAC).
Faith also said that the recent subsidy removal was taking a toll on her business.
She said: “The government should leave us alone; we are not registered and we are already paying too much money. Apart from the store rent which is yearly, I pay up to N10,000 to AMAC every month. I pay the electricity bill.
“This recent subsidy removal has increased the cost of transportation. Now, I pay three times the amount I used to waybill just a product, and this is why the prices of goods are on the high side. These taxes may drive many people out of business if care is not taken.”
Ibrahim Musa Rafsanjanni, executive director of Civil Society Legislative Advocacy Centre, said that the taxes may deepen the struggles and hardship faced by small business owners.
He said: “This is extortion, in the face of multiple taxes that businesses are made to pay. This is at the wrong timing and shows lack of consideration for the struggle of the poor Nigerians.
‘’These hardworking and poor traders easily get by through struggling; this will destroy their businesses and it’s not a well-thought-out decision. These small businesses do not get any form of relief from the government to aid their businesses.
‘’Coupled with the impact of the fuel subsidy removal, this government should be creating a conducive environment for businesses especially at the lower levels, this will help in reducing poverty.”
For Muda Yusuf, the director of Centre for the Promotion of Private Enterprise, the economics of collection does not support the move as the cost of collection would be more than the amount that could be collected.
According to him, over 98 percent of the informal sector traders are microenterprises who do not fall within the threshold of entities that are liable for VAT payment.
‘”The informal sector associations are highly fragmented. It would be impractical to develop a partnership framework with the market associations for the collection as contemplated by the FIRS,” he said. “Most informal sector operators have not recovered from the shocks of the fuel subsidy removal and the associated inflationary impact.”
Yusuf also noted that most informal sector operators have no records that could be used for purposes of assessment, stating that there is a high risk of arbitrary assessment.
He also stressed that the literacy level of the operators in the sector is very low which would create communication issues.
He said: “Most informal sectors are already paying all manner of levies to local governments, and several non-state actors. The government need not burden them with additional taxes.
‘’The FIRS should think of more creative ways of taxing the informal sector players in ways that will be more cost effective, less disruptive and with minimal political cost. More importantly, the FIRS should adopt the pareto principle of focusing on the few players and individuals that could give the highest revenue yield. This is a model appropriate for an economy with a high level of inequality like ours.”