How the new VAT takes toll on Nigerian businesses

* Companies count losses in well-being, costs of production, profits

* Tax burden to be shifted to consumers

Web Editor | ConsumerConnect

As the new 7.5 percent Value Added Tax (VAT) rate took effect barely a month ago, not a few Nigerian companies are happy with the development which many have argued is already taking a heavy toll on their businesses.

The Nation reports that one of the civic responsibilities of every citizen whether as individuals or corporate entities, is to pay taxes, which, in all intent and purposes is a duty that should be fulfilled by all and sundry.

However, tax payment, which is otherwise regarded as a simple act of patriotism in any economy, is becoming a source of nightmare to many Nigerians, who have continued to taste the bitter pill of taxation in the country of recent.

New VAT rate and Finance Act 2020

Subsequent to the approval of the new Finance Act 2020, the new tax regime raised VAT from 5 percent to 7.5 percent commenced in earnest February 1, 2020.

It is recalled that Mrs. Zainab Usman, Honourable Minister for Finance, Budget and National Planning, had informed Nigerians, that the implementation of Value Added Tax (VAT) new rate of 7.5 percent will commence on February 1, 2020, after all the necessary administrative procedures had been completed, especially the gazette of the Act by the Federal Ministry of Justice.

While justifying the need for the new VAT regime at the time, Mrs. Usman said the VAT was increased from 5 percent to 7.5 percent in government’s bid to boost revenue which is badly needed to close the deficit gap in the 2020 Budget.

The VAT system in Nigeria is administered by the Federal Inland Revenue Service (FIRS).

However, despite loud assurances from the authorities that the after effects of the new tax regime would not pose additional burden on the taxpayers, there are fears that the implementation of the new tax policy is already taking a heavy toll on businesses.

Tax burden on businesses

Several business owners have continued to lament what they described as ‘excruciating burden’ of taxes in recent times, which they opine is unfavourable to their well-being as profit-inclined ventures.

Speaking with separate members of the organised private sector they literally poured out their hearts as they lamented the pitiable state of their businesses.

The source further reports that Stanley Aghomi, a Warri-based manufacturer, who produces uniforms for offshore workers, said the new VAT increase had shot up his operational cost and adversely reduced his profit margins.

Based on the new increase already he says he have had to close down some of his production lines.

Aghomi’s lamentations are not different from Olawale Tijjani’s tales of woes.

Tijjani is the head of manufacturing plant in fast moving consumer goods company in Lagos.

According to him, the much touted ease of business policy is pure propaganda.

The government, as far as he is concerned, yet has a long way to go if it must achieve that laudable height.

“We are involved in the manufacturing of food supplements; as such we have to import some of the components which we cannot source locally.

The new VAT rate is already affecting our business substantially. Our continuous survival is not guaranteed anymore,” he said.

Like Aghomi and Tijjani, not a few businesses are affected and already counting their losses.

While addressing select journalists at the company’s Corporate Head Office, in Lagos, recently, Mr. Baker Magunda, Managing Director, Guinness Nigeria Plc, reportedly disclosed that the company is not immune to the growing wave of incessant government policies which has huge implications for businesses.

He said taxes remains a major cause for concern.

Although he noted that the government deserves to demand taxes required for the overall development of the country, he added that companies operating in the country need to be factored into the scheme of things.

This is because they remain an integral part of the business ecosystem contributing to the economic well-being of the country as a whole, Magunda said.

He who presented a scorecard of the company’s business during the financial year end, observed that Guinness Nigeria Plc as remained a formidable partner, as it paid over N1.6billion in taxes in 2019.

This, he said, was despite the many challenges that confronted the business.

Echoing similar sentiments, Colman Hanna, Supply Director at Guinness Nigeria Plc, while speaking on some of the challenges, said to the operating costs of the business.

According to Hanna, logistics of the business is worst hit by the new regime of taxes.

“Normally, we move a container from the Lagos Apapa Port for N500,000 plus, the cost of moving the same container rose to about N800,000 within the space of three weeks and we had to pay to avoid further surcharges.”

He notes that incidental expenses as this are disincentive to businesses.

Speaking with a cross section of operators within and around the nation’s ports, the same complaints resonated as they all lamented the increasing burden businesses have to bear and may ultimately be passed to the final consumers out there.

Tax aversion

A lot of Nigerians are averse to payment of any form of taxes because they feel governments at all levels are not accountable, according to a note by Lagos-based CSL Stockbrokers Limited.

They disclosed that a few small business owners they engaged in recent times were apathetic towards payment of taxes.

According to them, the reasoning of the small business operators was that it would be pointless to pay taxes to an allegedly corrupt government that has proved itself incompetent in terms of providing critical infrastructure and basic amenities in economy.

Nigeria’s tax system has been described by experts as one with various forms of loopholes.

As such, it is not inconceivable that the rate of tax underpayment by the upper class may be significant.

ABCs of tax

There are a good number of taxes payable by persons doing business in Nigeria. These include Company Income Tax (CIT), Personal Income Tax (PIT), capital gains tax, Value Added Tax (VAT), education tax, technology tax, stamp duties, and Withholding Tax (WHT).

According to the extant laws, The Nation reports, every business name owner who earns an income in Nigeria either from employment or from carrying on a business is subject to tax under the Personal Income Tax Act.

It is, however, instructive to note that the Federal Inland Revenue Service (FIRS) has continuously stressed that it is determined to bring many people into the tax net, especially high networth individuals and corporate citizens, most of who form the bulk of tax evaders and defaulters alike.

Mr. Bode Agusto, former Director-General of the Budget Office, at a public forum recently weighed in on tax evasion and default in payment that has been reported in the media space in recent times.

Mr. Agusto noted that some Nigerians are averse to payment of any form of taxes because they feel governments at all levels are not accountable.

He, however, observed that over 200, 000 wealthy Nigerians are the biggest tax evaders in the country. Tax laws should be made simpler, he advised.

MAN’s position

In the view of the Manufacturers Association of Nigeria (MAN) on the recent increase in Value Added Tax, there is an urgent need to look at the causal negative effects of the policy.

A position paper signed by Segun Ajayi-Kadir, Director-General of MAN, and made available to the press by Mr. Ambrose Oruche, Director of Media and Publicity, who is also the Acting DG of MAN, stated that the VAT increase of 50 percent would increase the cost of production in the country.

According Mr. Oruche, “it is not all VAT that you can recover; people may argue that VAT is an input tax that would be recovered on your products, but the truth remains that it is not all VAT that is recoverable.

“But the FIRS does not want to take off such VAT away from the manufacture, and such will hinder manufacturers greatly.”

Plausible as the recommendation to increase VAT may look, implementing it at this time would boomerang because the timing is inappropriate, especially at a time when the minimum wage of N30,000 was just agreed upon, he maintained.

He said this development could send a wrong signal that the government is not sensitive to the plight of the low and middle-income earners, who are clearly in the majority.

“A typical case of government simply taking back what was given with the right hand through the national minimum wage with the left hand through 50 per cent increase in VAT,” he stated.

Economic realities of new VAT

In terms of misery index rating, low per capita income, heavily lopsided income distribution pattern, the Nigerian economy will be in a more vulnerable state, as VAT is increased.

No controversy in that the burden of the tax would be shifted to the Nigerian consumers that are already struggling, the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted, many factories will witness serious downturn or wind down operations.

Report says this would also worsen the already high unemployment position of the country which is above 23% as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.

MAN, noted that as a strategic stakeholder in the nation’s development agenda, which appreciates the need for government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil.

However, the government should tread with caution in the drive for improved revenue for the following reasons.

The economy just recently exited recession with the fragile growth rate of less than 2% recorded in 2018, and should be delicately managed.

The precarious macroeconomic condition of the country requires palliatives that would improve investment and not higher tax burden.

An increased VAT will spur spontaneous increase in inflation rate, occasioned by increased prices of goods and services

The obvious resultant effects of implementing an increased VAT on the manufacturing sector includes lower purchasing power of consumers, sharp reduction in consumption, drop in sales, decrease in production capacity, lower government revenue, increase in unemployment and stifled economic growth in the end.

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