• Wednesday, February 28, 2024
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BusinessDay

VAT increase to hurt consumer spending

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An air of melancholy surrounded Kunle Badmus as he sat on a chair in his office, while contemporaneously staring into space like a sorcerer trying to foretell someone’s destiny.

The 51-year-old civil servant has come to the realization that he will be paying for more for goods and services as government plan to hike Value Added Tax (VAT).

The proposed hike will increase sufferings of the people because low-income earners spend the large chunk of their income on those taxes, according to Badmus.

“ This is not the right time to take such a decision, a lot of civil servants are grappling to survive and even the take-home pay no longer take us home,” said Badmus added.

Nigeria will increase the rate of value-added tax to 7.5 percent from the current 5 percent in 2020 as Africa’s biggest oil producer seeks to shore up falling revenue.

“We have developed a strategic revenue growth initiative, which we have started to implement,” Ahmed said. “Our target is to increase revenue to 65 percent minimum in 2019 so that in the next three years, we are able to attain 80-85% of our revenue target,” said Zainab Ahmed, former Minister for Finance.

While West Africa nation with a population of 200 million people wants to shore up revenue and shrink fiscal deficits to compensate for the sudden drop in crude oil price that tipped the country in its first recession in 25 years, analysts see the proposed policy doing more harm than good to the economy.

Because of lower income households spend a greater share of their income on consumption than higher income households do, the burden of VAT falls on the former.

Dairy, Confectionary, Baked foods, bottled water, Juice, carbonated categories, and the drinks industry will be hit by the hike.

There could also be increased inequality because VAT (like any other consumer tax), do not tax the returns (such as dividends and capital gains tax0 from new investment.

Ayodeji Ebo, managing director and CEO of Afrinvest Securities Limited said the main strategy should have been to use technology in widening the tax net rather than squeezing consumers, adding that the informal sector should have been the target of government.

“It will compromise disposable income and costs of goods and services will go up and purchasing power of the poor will be eroded,” said Ebo.

Ebo added that if there are no measures to improve business activities, then the new hike could lead to a slowdown in economic activities.

President Muhammadu Buhari’s economic policies are causing more pains than ease to manufacturers and importers, raising concerns on how his administration intends to lift 100 million people out of poverty.

For instance, the exchange rate for Customs duty has increased from N306 per dollar to N326/$, as  clearing agents said the new rates would definitely add to the cost of clearing cargoes from Nigerian ports and the prices of goods in the market.

With the proposed increase in the rate of VAT, combined with the new custom rates, the poor’s purchasing power will be eroded because the tax burden will be shifted to them in the form of higher prices.

The aforementioned is a double whammy for a country that took the baton from India to become home to the highest number of people in extreme poverty in the world.

Some 87 million Nigerians live on less than $1.90 a day, and the imposition of additional taxes could result in the figure balloon.

The economy has been growing sluggishly as Gross domestic product in expanded by 2.01 percent in the three months through March from a year earlier, according to recent data from the Office of the Bureau of Statistics (NBS).

Consumer inflation for the month of May stood at 11.40 percent, below the Central Bank of Nigeria (CBN) target range of 6 and 9 percent.

The average consumer is not in a strong position to withstand the additional tax burden. Government should focus more on growing the economy rather than overburdening the people with a tax increase, according to Johnson Chukwu, managing director and Chief Executive Officer of Cowry Asset Management Ltd.

“The trade sector will be affected and whatever gains are made from the new minimum wage will be wiped out by the hike,” said Chukwu.

Omotola Ambibola, Associate Investment Research analyst at Chapel Hill Denham Limited said that rather than increase VAT, the government should ensure compliance at all level because more taxes are collected from urban areas with low poverty rates than the rural areas.

“Although the hike will reduce some of the fiscal deficit, the downside is that it will hurt consumption and the economy given that the formal sector that are already taxed will bear the burden,” said Ambibola.

Sectorial distribution of Value Added Tax data for the first quarter of 2019 reflected that the sum of N289.04 billion was generated as VAT in the first quarter of (Q1) 2019 as against N298.01 billion generated in the last quarter (Q4) of 2018 and N269.79 billion generated in Q1 2018 representing 3.01 percent decrease quarter-on-quarter and 7.13 percent increase year-on-year.

Other manufacturing generated the highest amount of VAT totaling N31.42bn and closely followed by professional services that generated N24.31bn, commercial and trading generated N14.92bn while mining generated the least. It was closely followed by pharmaceutical, soaps & toiletries and textile and garment industry with N59.88m, N201.58m, and N298.14m generated respectively.

Experts say there need to research on how the poor spend their money even though the government wants to shore up revenue and shrink fiscal deficit.

 

BALA AUGIE