The Finance Bill, the first of its kind in 20 years, recently signed by President Buhari and passed into law is a step in the right direction. Proof of the success of the bill, however, is its implementation.
It fills a fiscal vacuum that the central bank has struggled to fill in a bid to revive the economy through unorthodox policies, interventions and directives. An increase in value-added tax (VAT) to 7.5 percent means more revenue for the federal government. With more revenue, budget deficits should reduce, the federal government borrow less, spend less on debt servicing, and have more funds to deploy on capital expenditures which stimulate GDP growth.
In addition, it aligns domestic tax laws with global best practices but most importantly raises revenue for the federal government. The latest tools proposed for tracking and collecting taxes which are included in the bill makes Nigeria an early adopter of tax systems in a digital era. The finance bill, in addition, will help promote fiscal equity, introduce tax incentives for investments in infrastructure and the capital market, and support small businesses.
Furthermore, if implemented properly the bill complements the regulatory reforms that improved the position of Nigeria on the Doing Business Rankings in 2019; it moved up 15 places to 131st position. Paying taxes, starting a business, getting electricity, registering property and trading across borders were the areas it performed poorly. More bold reforms must be implemented.
The economy is still recovering from the substantial terms-of-trade shock that triggered the 2016 recession. The last two years has seen a rebound in oil prices, higher foreign reserves, tighter monetary policy, and convergence in foreign exchange windows and led to a decline of inflation (although the general prices are rising, crimping purchasing power). Still, Nigeria’s overreliance on oil revenue is like Manchester City counting less on winning its matches and more on Liverpool to lose in order to win the English Premier League. A significant oil shock and the economy will shrink – 90 percent of the dollars Nigeria earns is from crude oil.
When considering the implications for small businesses, the provision of no Company Income Tax (CIT) and Value Added Tax (VAT) for businesses with revenue less than or equal to ₦25 million would help companies within this threshold save more money and deploy into more profitable projects for expansion. This will in turn create more jobs and in the long run reduce unemployment rate which is currently 23 percent.
The finance bill isn’t void of drawbacks. According to a report by Deloitte, there is a possibility that investors may take advantage of this proposed provision. The same promoters could set up several companies carrying out similar businesses but earning just below ₦25 million or ₦100 million in order to avoid paying taxes or paying at a higher rate accordingly. To this end, the FG must put in place administrative regulations that discourage such practices.
Also, companies not exempted from the new VAT, are caught in between whether to pass on higher costs to already squeezed consumers or bear the cost. Increasing prices of goods may see consumers port to cheaper products, hence shrinking their revenues. Companies quoted on the stock market will have to cut costs otherwise investors will sell their shares if they sense higher expenses will affect profitability.
The federal government has reemphasised its commitment to use income from the VAT increase to fund the pay for the new minimum wage, at the expense of more economic threatening challenges like the yawning infrastructure gap. With inflation moving northwards, implementing the ₦30,000 minimum wage could put pressure on inflation, further reducing the purchasing power of consumers.
