Nigeria's leading finance and market intelligence news report.

Vat increase and Nigeria’s GDP: Borrowing a leaf from Djibouti’s strides

As part of his effort to lay a solid foundation towards economic prosperity, president Buhari, on January 13, signed into law the hitherto Finance Bill, which basically, came as a child of necessity, and which among other things, focuses on generating revenue for the government, facilitate the ease of doing business and raise Nigeria’s tax base with a view to meeting global best practice. In another stroke of economic rejuvenation, on January 20, the president; converged in London in a maiden program tagged UK-Africa Investments Summit, basically to showcase and promote the breadth and quality of investment opportunities across Africa.

Chief among the subjects of discourse was the assessment of 2019 performance on countries’ economies and how best the UK government can assist in charting course for Africa’s development. This gathering, however, is not unusual, conferences in form of such had been held at both intra-region, regional and at global levels.

* indicates required

In Nigeria, even at state level, being components of a nation, it is not a novel scene seeing political candidates, at every level, selling, their economic plans and how they intend to transform the economies of their respective states, from languishing from a vicariously dead state to an economic posterity. I could recall vividly, some candidates (now governors or opposition voices) reeling out their proposed plans for the economies of their respective states in the wake of the 2019 general elections. Probing questions like: how would you grow the GDP of your state? How do you intend to optimise a perfect budget implementation? Expectedly, some of them managed to muffle their proposed economic agenda to their politically despair viewers.

The kernel of this piece, as a magnum opus, is on how governments grapple with the decision on how to strike a balance between the growths of GDP, by either expansion of areas of coverage of goods that are taxable on one hand or an increase in the percentage of existing taxable goods on the other hand. Whether the government should imbibe the idea of increasing VAT rate or tax rate generally so that it can generate more money for infrastructural financing, which in most cases meets with criticisms from the poor masses or increase in the number of goods and services that are taxable which would definitely have a resultant effect on the perception of ease of doing business, and at large the nation’s economy.

According to the index of doing business report, released for year 2020, which provides objectives measures of business regulations and their implementation across 190 economies both at national, regional, subnational and global levels, Nigeria jerked up on the ladder of ease of doing business from 151, 146 and 131 positions in years 2018, 2019 and 2020 respectively. The parameters which were used in assessing countries in terms of this are availability of infrastructure, registration of properties, tax systems, legal compliance, enforcement of trade rights, resolving insolvency and resolution of disputes. Decayed infrastructural development is one of the major reasons while multinational companies as well as small and medium scale enterprises go on extinction in Nigeria.

Faced with inept and indecisiveness in solving its economic crisis, the Nigerian government appears to be politically inclined and convinced that, with increase in tax Value Added Tax percentage, general effective system of taxation and proper utilisation of tax money in returns for investment growth, the economy of a country gets a progressive, though, steady economic turnaround. It in its bid to achieving these economic objectives, the approach that has always been resorted to, is the increase in the percentage of amount paid on taxes, especial VAT. This is done with a view to generating more revenue for the government.

However, there is another school of thought in economic development that posits that instead of increasing the percentage of the amount paid on taxes, what should be done, instead, is propagation of a system of increase in the array of things that are taxable. While the former remains a tested and verifiable economy strategy that has been utilised by some of the developed countries, I choose to align with the latter which takes into cognizance that there are other lacunae or factors that can been inculcated into the system without necessarily stifling the investors with outrageous increase in the percentage amount paid on taxable goods.

Summarily, the point we are driving at here is that, from the political perspective, a good public relation strategy needs be cobbled together between the gap of raising the Internal Generated Revenue, IGR of a state, by means of raising the percentage amount paid on taxes on one hand and the expansion of the area of coverage of the goods and services that are taxable on the other hand. Where the government takes to the former, that is, by raising the percentage of tax on every taxable goods and services, the consequential effect would be an albatross of stifling the growth of business sector, and particularly, worse affected is the Small and Medium Scale Enterprises; SMEs, which is a key driver of every progressive economy. The economic blunder could further be exacerbated, where there is no tell-tale infrastructural development emanating as a result of such increase in the percentage of the amount of tax.

With the new Finance Act, which comes with increase in VAT from 5 percent to 7.5 percent increment and some other exemptions; this may irk the poor masses and may inveigh the acceptance of the government at the federal by the same hapless masses, thus, making it anti populism. For example, Djibouti as a country strategically located at the horn of Africa’s continent, with less buoyant economy compare to Nigeria’s, currently ranks in the spectrum of the ease of doing business as 99 positions, progressing from the bottom 154 position which it was in 2018. This was not achieved by increase in its VAT rate; rather, in a bid to achieving the long term economy plan, the Djiboutian government strengthened its service-based economy which entails the aviation, sea, tourism and banking systems. It is believed that rather than increased ratio in tax with a view to raising revenue for the government of the coast-laden country, Djibouti, the human capital development, infrastructure development and optimum resource maximization and efficient legislations should be strengthened and public private partnership were considered instead of increase in tax ratio.

Contrary to the general presumption; economic development does not mechanically translate into increases in the tax take. For example, in India, income tax revenues have stagnated at around 0.5 percent of her GDP since 1986. Therefore, widening the scope of taxation to broad bases as income and value added is only feasible if accompanied by investments in compliance structure.

One of a striking feature of a progressive economy is the capacity of its government to raise its GDP through fiscal mobilisation. For example, on average, France, Germany, the Netherlands raised their GDPs through tax revenue which dismally was around 12 percent of the then GDP, which by the new millennium have risen to 46 percent. This is same with the US whose tax contribution rose from 8 percent to 30 percent. According to the study carried out on the increase, the underpinning of these hike, in these countries’ GDPs are a number of tax innovations which included the extension of the income tax wide population. The governments in these countries were able to facilitate large scale compliance with the income tax, which required states to build a tax administration and also implementing withholding at source. Such investments in fiscal capacity have enabled the kind mass taxation, now regarded normal throughout the developed world.

In conclusion, what in my believe will dent the popular acceptance of the recent economic moves by the Nigeria’s government, especially the VAT increase in the Finance Act, is its regressive tax nature, of the VAT’s section of the Act, which is a system of taxation that is applied uniformly, irrespective of one’s economic status, resulting in a larger percentage being taken from low-income earners than from high income earners. I am firmly of the view that Nigeria has more robust tax legislations in place, capable enough to generate sufficient money for the government. What I will opine the government should do is to ensure that we strengthen the institutions that are saddled with the responsibilities of generating income for the government, block all tax leakages, implementing stiff sanctions on any infraction of the existing legislations, and also meting severe penalty against tax avoidance and tax evasion. That way, I strongly believe that, putting measure to strict compliance to the existing tax laws will do more good, rather than enacting a regressive form of taxation that makes the poor to cough more from their pockets than the rich.



Balogun, a legal practitioner and economics enthusiast, wrote in from Lagos., 08038234989


Comments are closed.