FG’s tax drive: In whose interest?

We estimate that the raft of new taxes being implemented by the government and the new regime of shakedowns of citizens and businesses by tax authorities may not necessarily increase government revenues.

They will only reduce income for individuals and revenues for firms and businesses hence lead to unemployment and lower tax revenues for government.  The government should rather busy itself with enforcing existing tax laws and selling off dead assets to improve its revenue profile.

Nigeria is in the midst of a revenue crisis. Oil revenue has greatly declined. Foreign and domestic debts are at an all-time high of $81.27 billion (N24.947 trillion) as at March 2019. Government revenue to debt service ratio, by some conservative estimates, is put at 70 percent.

Consequently, the government has to borrow to maintain operations and finance the budget. The government even queried the Federal Inland Revenue Service (FIRS) on its inability to meet revenue targets.

To shore up revenues, the government has gone about increasing taxes and aggressively enforcing tax payments.  It issued notice of a planned 5 percent Value Added Tax (VAT) on online transactions effective January 2020. A new Nigeria Police Trust Fund was also created, compelling companies operating in Nigeria to pay 0.005 percent of their after-tax profits to the fund to help equip the police.  It also planned increasing the VAT charge from 5 percent to 7.5 percent. The Senate, while disagreeing with VAT increase, has suggested instead a 9 percent communication service charge.

What is more, the government, through the tax agency, is exercising its power of substitution, ordering banks to freeze alleged tax defaulters’ accounts and deduct alleged taxes due from the accounts without recourse to the taxpayers. This is in addition to undue and unnecessary shakedowns of individuals and businesses to pay more tax even after it is established they are up to date with their tax payments.

We understand government’s desperation to raise revenues. But we are also concerned that these new taxes and tax raise will not substantially improve government’s revenue and will instead put the economy in a worse shape than it is at present.

To begin with, ad valorem tax – whether value added or sales tax – leads to income loss, at least for individuals, since firms are expected to pass it on to individual. We also have to assume that this income loss is equal to revenue loss by the firms. The moment firms are affected, they will be forced to reduce labour demand, which will, in turn, affect negatively employment.

Meanwhile, the minimum wage has also been increased and it will ultimately affect bottom line of firms and businesses. The combined effects of new taxes, raised VAT and the new minimum wage which will come into effect soon will be squeezed margins. And if we know anything about firm behaviour when faced with squeezed margins, the first line of response is to reduce labour cost by laying off workers. Unemployment will increase and aggregate demand will also drop. Naturally then, the effect will be lower revenues to government, far lower revenues than before the new tax and tax increases.

Granted that the current VAT rate is one of the lowest in the world and that government needs to increase revenue, its timing and strategies may not be right.  This is an economy on the brink of another recession, growing at less than 2 percent (lower than population growth) and with unemployment rate at an all-time high of 23.1 percent.

For such a struggling economy, introducing new taxes and raising VAT will just compound the problem and drive the economy into another recession. There are a surfeit of measures to adopt in tackling revenue shortfalls, some of which include better collection of existing taxes and selling off dead government assets.