The impact of the finance act on the administration of value added tax in Nigeria

INTRODUCTION

On January 13, 2020, President Buhari signed the Finance Bill into law, thus, introducing some of the most remarkable and unprecedented changes to the Nigerian tax administration in the 21^st century. In the wake of coming into force of the Act, the most debated tax change introduced by the Finance Act has been the increase of the value Added Tax (VAT) rate from 5 percent to 7.5 percent.

This development appears to be in tandem with one of the objectives of Nigeria’s National Tax Policy, which is the need to achieve economic growth through a measured shift from reliance on direct taxes (such as income taxes) to indirect taxes (such as VAT). Accordingly, many believe that alongside a keen desire to increase revenue significantly through higher VAT remittances, the government also seeks to explore a shift to indirect taxes.

Whilst the government’s actions may be laudable, it would seem that a 50% increase in the rate of VAT has attendant consequences; many of which are feared for being capable of increasing the general tax burdens of businesses and their consumers. It is also envisaged that the change in the VAT regime will have noticeable microeconomic/ macroeconomic impacts on the Country.

Accordingly, this article concisely examines the possible economic effects of the change in the VAT regime in Nigeria, particularly vis-à-vis the increase in the VAT rate.

PROVISIONS OF THE FINANCE ACT (ON VAT) WITH SIGNIFICANT ECONOMIC POTENTIALS

Some of the changes introduced by the Finance Act to the administration of VAT in Nigeria are as follows:

1. Section 34 of the Finance Act increases the VAT rate from 5% to 7.5%.

2. Expansion of the definition of ‘goods and services’ subject to VAT in Nigeria to defy the limitations placed by the applicability of the definition in the VAT to the digital economy (see section 33 of the Act).

3. Section 37 of the Finance Act alters section 14 of the VAT Act to the effect that non-resident companies supplying taxable service in Nigeria must charge VAT in their invoices. Where they fail to so do, the person to whom the service is supplied to in Nigeria now bears the responsibility for the failure to charge for the VAT.

4. By provision 38 of the Finance Act, only businesses with taxable supplies, the value of which singularly or cumulatively (in any calendar year) amounts to at least 25 million naira have to bother about being responsible for registering for or charging VAT.

5. Also, the Finance Act provides that taxpayers can now resolve issues with the FIRS via email correspondence.

PROJECTED ECONOMIC IMPACT OF THE CHANGES IN THE VAT FRAMEWORK

There have been concerns in certain quarters that some of the recent changes in the VAT framework may not be in the best interest of taxpayers, citizens, and in fact, the economy (with the bulk of these concerns bordering on the 50% increase in the VAT rate). Amongst other things, there have been concerns as to:

1. The efficacy of these changes for boosting revenue growth in the country;

2. The timing and the propriety of this increase as a fiscal policy initiative (given the current economic realities of the day);

3. The potential impact on consumers who bear the ultimate burden of the imposition of the VAT;

4. Whether it the new regime will positively affect the revenue problem of various states in the country (seeing as 85 percent of the revenue generated through the VAT is shared amongst the 36 states of the Federation); and

5. The impact of the proposed increase on investment activities in the country, etc.

Notwithstanding, some of the projected economic impact of the changes introduced to the VAT regime are discussed below.

1. Increase in Revenue:

The idea behind the implementation of a higher VAT rate is to increase the tax revenues accruing to the Government. Consequently, with a 50% increase in VAT rate, it is believed that this will lead to a corresponding increase in tax revenues for the Government. Although, due to other factors such as; high cost of goods and services, increased consumer spending, inflation, the timing of the execution of the policy, etc. it is doubtful that the 50% increase in the rate will lead to a 50% increase in the revenue generated or a general improvement in the economic conditions of the country.

It is often said that less expenses is tantamount to more resources. Thus, with the introduction of a VAT compliance threshold (exemption of businesses with an annual turnover of N25 million from remittance) it is expected that the cost of administering VAT (or ensuring compliance by relatively small businesses will be saved), since the tax authorities can now focus its resources on ensuring compliance by large businesses only. When considered in addition to the increased VAT rate, it is envisaged that increased tax yield may be achieved on an overall basis.

Inflation:

As an economic principle, a general increase in the price of goods and services in the country will lead to cost-push inflation. Ancillary to this is the fact that the general increase in the cost of goods, services, and then factors of production will lead to a reduction in the supply of these goods and services. At the moment, Nigeria has a remarkably high inflationary rate (which is currently at 11 percent) and the implementation of this new VAT rate will lead to an increase in prices of goods and services, thereby possibly worsening the inflation situation in the country.

Pressure on the Fast-Moving Consumer Goods (FMCG) Market

The FMCG market enjoys a high level of patronage directly from the consumers. The implication of this situation is that an increase in the VAT rate will affect the cost of goods in the FMCG sector, thus placing the manufacturers and businesses under pressure to stay competitive. This can either force the businesses within the sector to absorb the high cost of the VAT or transfer them to the consumers – both situations put pressure on the businesses operating in the sector and do not seem to augur well for businesses.

1. Increase on the Regressive Effect of the VAT on Small Income Earners

The VAT is a regressive tax. Accordingly, a general increase in the VAT will lead to a corresponding increase in the price of goods and services. This situation leaves the small and middle income earners in the economy with less disposable income. This is due to the fact that consumers who fall into this income category have to spend most of their income on goods and services (especially essential goods and services) and an increase in the VAT rate affects the income at their disposal.

It is believed that the consumers in the lower end of the personal income tax bracket will be worse hit by the increment. This situation can easily lead to widening the income inequality gap in the country. It is also expected that with reduced disposable income to the consumer will come decreased consumption rate in the economy (for low-earning households especially).

Nevertheless, it is envisioned that the VAT exempt status of a variety basic food items in the Finance Act should help to mitigate the harsh effects of an increase on the VAT rate on small and middle income earners.

IMPACT OF THE NEW VAT REGIME ON THE DIGITAL ECONOMY:

Section 33 of the Finance Act, expands the definition of what is amenable to the VAT in Nigeria to cover services rendered in Nigeria or to a person in Nigeria whether the person is present in Nigeria or not. This definition seeks to defy the restrictions of physical presence that help proprietors in the digital economy to avoid taxes. Its expansive nature is therefore a welcome development for the tax authorities to help address the revenue shortfall that is created by the ‘permanent establishment’ criteria, especially vis-à-vis companies operating in the digital economy.

The adoption of email correspondence for communicating with the FIRS by the Finance Act is a milestone in the administration of taxes in Nigeria. This process is expected to ease the bureaucratic bottlenecks that can be associated with administering taxes in Nigeria.

EXPLOITATION OF VAT POTENTIALS OF THE INFORMAL SECTOR

The tax potentials of the informal sector in Nigeria are incredible. Although the exact size of the informal sector in Nigeria is unknown, research carried out by the Chatham House Royal Institute of International Affairs estimates that the informal sector in Nigeria accounts for about 64 percent of the Gross Domestic Product (GDP) of Nigeria. This number simply reveals that the informal sector, if properly exploited by the Government for revenue generation through effective taxation; has the potential to turn our tax fortunes around.

The informal sector is renowned for its elusiveness and operation beneath regulatory radar. To remedy this, section 28 of the Finance Act provides that a person intending to open a business account in the country will be required to provide details of his or her Tax Identification Number (TIN). This is a move clearly aimed at bringing not just the businesses but the proprietors into the tax net.

Although this approach is laudable, it fails to show how business proprietors with pre-existing bank accounts or those who use their personal accounts for their businesses can be brought into the tax net.

CONCLUSION

No fiscal policy initiative is worth its salt if it does not bring prosperity for the nation or improve the general wellbeing of its citizens and the economy. It is against this backdrop that the impact and potentials of the VAT regime are being debated and addressed in this piece as well as in the media.

Importantly, the changes ushered in are capable of improving the extant system, if properly implemented. It is therefore hoped that the new VAT regime, as impressive as it is, fulfils its mandate through proper execution of some of the innovative provisions and amendments contained in the Finance Act.