FGN Seeks To Raise VAT Rather Than Reform Taxes

Vice-President Yemi Osinbajo, has approved the revised national tax policy to address low taxation in the country. Finance minister Kemi Adeosun spoke as regards the policy….

“What the (review) committee report has shown is that we should look at actually increasing VAT on some luxury items. At 5% we have lowest VAT. “And while we don’t think VAT should be increased on basic items, if you are going to drink champagne, for instance… in the UK you drink champagne the VAT is 20%, so why should it be 5% in Nigeria. “So they have made recommendations that we should pull out some luxury items and increase VAT on those items immediately. “And I think that is a very valid and sensible suggestion which we are going to take to the national assembly to see how we can implement it.”

“But as far as basic goods are concerned, no there will be no tax increase. I believe it is only fair that when you consume luxury goods you should pay a little bit more.  The National Assembly will decide the percentage

This is a tax-hike  Trojan house.

Who determines what items are “basic and “luxury”….is office furniture “basic” or “luxury”? are hair attachments and cosmetics “basic” or “luxury” ? are GSM Data packages “Basic” or “Luxury”?…what about air-travel? “basic” or “luxury”

The Administration has increased VAT, but for political reasons wont call this a tax hike.

Make no mistake, Nigeria  tax-to-GDP ratio, at 6% is one of the lowest in the world, Ghana is at 20% with Kenya at 18%. We need a tax reform, but should a government be raising taxes in a recession? is the government economic team unaware this hike will hit at disposable income? The tax reforms that are needed are not to increase taxes alone but to reform the entire tax and fiscal structure of Nigeria. At present, the Federal Government legislates and collects almost all fiscal revenue.

Nigeria as a Federal Republic should have the fiscal powers based on a three-tiered structure of Federal, State and Local governments but this is not so. The Nigerian tax system favors the Federal Government.

All fiscal enactment powers are held by the Federal Government e.g. Personal income tax (PIT) is legislated by the Federal Government, payable by individuals, but collected by State authorities. For concurrent taxation such as the Capital Gains Tax and Stamp Duties, the Federal Government retains legislative power, while sharing administrative powers with the States. The Federal Government has jurisdiction for such taxes as VAT and Education tax. The Federal Government also taxes corporate bodies while State and Local Governments tax individuals. The State and Local governments really have had no freedom to introduce new taxes because matters dealing with taxation are on the Exclusive list of the constitution. They may enact laws only with the concurrence and approval of the National Assembly

If Nigeria devises a tax reform plan that devolves fiscal powers to States and Local Governments, that becomes a reform that boosts the overall economy and allows States and Local governments the ability to use taxation not just as a means of earning revenue but of attracting investment and competing. Ogun state for instance can use a lower VAT or CIT rate as an incentive to attract investors from Lagos to Ogun State. Yobe State can declare its State a “tax free” zone to attract Dangote Industries to set up a factory there.

States like Lagos earn almost 80% of their income from the PIT, but they cannot determine the rate to apply to attract investment. The Company Income Tax CIT and the VAT are collected in States. Lagos State may build roads and attract multinationals to Lekki but the federal government will take the revenues generated by VAT from these multinationals to the central VAT pool. States like Lagos may thus see no incentive to enforce the payment of “Federal” taxes as these taxes are sent to the centre. This pushes States to seek other means to generate “Internal Revenue” like the Lagos State Hospitality Sales Tax, increasing the tax burden on the tax payer in Lagos.

The Central Bank of Nigeria estimates that Lagos State has about 60% of the manufacturing and commercial activity in Nigeria and bears the bulk of commercial activity costs. Lagos is the generator of the highest VAT and the highest Customs duty, should it not see these tax benefits?

Should the Nigerian Federation continue to share fiscal revenues with factors such as equality of states (40 per cent), population (30 per cent), landmass and terrain (10 per cent), social development needs (10 per cent), and internal revenue efforts (10 per cent)?

Why cant a reform introduce allocating Internal Revenue Efforts even derivation at a higher share , perhaps 50%.

A tax reform that address rates, scope, parties with an emphasis on devolution and progressive rates should be the target.






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