Home Economy FG sends Bill on tax reforms to NASS, to give legal backing to increase in VAT

FG sends Bill on tax reforms to NASS, to give legal backing to increase in VAT

by Business News Report

Minister of Finance Zainab Shamsuna Ahmed has said that the federal government has introduced a bill in the National Assembly to give teeth to increase in Value Added tax and reform the tax laws generally. Speaking in what the IMF tagged Governor Talk the Minister told the audience made up of investors and financial gurus that “On tax laws, we just submitted a finance bill alongside our 2020 budget proposal to the National Assembly for consideration and passage into law. This Finance Bill has five strategic objectives, in terms of achieving incremental, but necessary, changes to our fiscal laws. These objectives are: promoting fiscal equity by mitigating instances of regressive taxation; reforming domestic tax laws to align with global best practices; introducing tax incentives for investments in infrastructure and capital markets; supporting Micro, Small and Medium-sized businesses in line with our Ease of Doing Business Reforms; and raising Revenues for Government”.

Zainab said that the draft Finance Bill proposes an increase of the VAT rate from 5 per cent to 7.5 per cent. As such, the 2020 Appropriation Bill is based on this new VAT rate. The additional revenues will be used to fund health, education and infrastructure programmes. As the States and Local Governments are allocated 85 per cent of all VAT revenues, we expect to see greater quality and efficiency in their spending in these areas as well. She further said “Additionally our proposals also raise the threshold for VAT registration to N25 million in turnover per annum, such that the revenue authorities can focus their compliance efforts on larger businesses thereby bringing relief for our Micro, Small and Medium-sized businesses. She said that “the VAT reform is meant to improve Nigeria’s VAT as a share of GDP in Nigeria which has declined from 1 per cent in 2010-2013 to 0.8 per cent in the last four years (2015 – 2018). This is significantly below the median of 5 per cent of GDP in other comparable African countries. Nigeria’s low VAT-to-GDP is attributable to the low nominal VAT rate, which at 5 per cent is the lowest in the African region (which averages at about 16 percent). Furthermore, the efficiency of VAT collection, at 0.2, is well below the African regional average of 0.33”. 

According to the minister “The inefficiency in VAT collection is partly due to challenges in our tax administration system, but also reflects the high level of items currently exempt from VAT, including the consumption of basic food, pharmaceuticals and educational items. As such, the proposed VAT increase is likely to impact more on consumption by the urban communities and the wealthier sections of the population, than on the poor. The Ministry of Finance, Budget and National Planning will also closely coordinate its fiscal policies with the Central Bank’s current tight monetary policy stance, to ensure that the appropriate out turns are achieved in terms of growth, consumption and inflation. Any residual impact on inflation, which is anticipated to be insignificant, is projected to rapidly attenuate given the downward trajectory of inflation, which has declined from 17.6 per cent in June 2017 to 11.3 per cent in August 2019. Furthermore, the increased funds available from the VAT rate increase will facilitate an expansion of social assistance programs, funded by additional VAT revenues”. 

The Minister further said “Amidst the highly constrained fiscal space we faced, I am pleased to inform you that the Nigerian economy thus far has recorded nine consecutive quarters of GDP growth. Annual growth increased from 0.82 per cent in 2017 to 1.93 per cent in 2018, and 2.02 per cent in the first half of 2019. The continuous recovery reflects our economy’s resilience and gives credence to the effectiveness of our economic policies thus far. We also succeeded in significantly reducing inflation from a peak of 18.72 per cent in January 2017, to 11.24 per cent by September 2019. This was achieved through effective fiscal and monetary policy coordination, exchange rate stability and sensible management of our foreign exchange. We have sustained accretion to our external reserves, which have risen from US$23 billion in October 2016 to about US$42.5 billion by August 2019. The increase is largely due to favourable prices of crude oil in the international market, minimal disruption of crude oil production given the stable security situation in the Niger Delta region and our import substitution drive, especially in key commodities. Furthermore, as a sign of increased investor confidence in our economy, there were remarkable inflows of foreign capital in the second quarter of 2019. The total value of capital imported into Nigeria increased from US$12 billion in the first half year of 2018 to US$14 billionfor the same period in 2019. 

“On revenue performance, we have recorded year on year improvement on both revenue out turns and revenue to GDP ratio. Our revenue outturn as at December 2019 55%while it was58%as at June 2019. Our revenue to GDP ratioon the other handis 8%as at end of June 2019while it was5%as atDecember 2017.Nigeria needs a lot of resources to actualise the ERGP and other development plans, which are at risk of being underfunded. Regarding the 2019 Budget, as at 30th June, the actual aggregate revenue as per our Fiscal Accounts was N2.04 trillion, indicating a revenue shortfall of 42 percent, to underperformance of both oil and non-oil revenue targets. Similar revenue shortfalls have been experienced since 2017, when the Economic Recovery and Growth Plan was launched, resulting in serious deviations from our targeted revenue and expenditure projections. Infrastructure master plan requires about $3 trillion over 30 years over the next 30 years to sufficiently address our infrastructure deficit. To achieve all these, we need fiscal sufficiency and buoyancy, which must come through domestic revenues for it to be sustainable. We currently have a pervasive revenue generation problem that must change to successfully finance our development plans. Speaking to the facts, our current revenue to GDP of 8% is sub-optimal and a comparison of oil revenue to oil GDP and non-oil revenue to non-oil GDP performance reveals the significant area that requires immediate and dire intervention as the non-oil sector. This performance attests to the realities of our inability to efficiently and to a reasonable degree, completely collect taxes from our non-oil economic activities.

According to her presentation “Nigeria when compared with peers shows that we are lagging on most revenue streams including VAT and excise revenues as we not only by far have, one of the lowest VAT rates in the world but weak collection efficiencies. So also, do we have a lot of incentives and deductions that further constrain the fiscal space that are given in hope of stimulating growth of our industries and to reduce hardship for the poor and vulnerable. The key question is why do we keep performing poorly? And what can we do differently this time to effectively turnaround without any relapse even in successive governments? Simply put, we have very low effective tax rates, archaic tax laws that are not evolving at commensurate pace with businesses, leakages in our revenue collection systems, low tax compliance rates and poor tax morale to mention a few. With numerous complex issues at hand, Nigeria must do things differently which requires robust, tough, well-coordinated and multi-faceted reforms. 

“Last year, we launched the Strategic Revenue Growth Initiatives (SRGI) which provides a turnaround blueprint and mechanism that brings together revenue generating entities to review implementation progress. SRGI is built on three thematic areas including: (1) to achieve sustainability in revenue generation (2) identify new and enforce existing revenue streams and (3) achieve cohesion through people and tools. The initiative includes some cross-cutting enablers including data and technology, performance management and enabling laws and legislations. Although, the SRGI contained a robust set of initiatives that was cascaded down as program portfolios to revenue generating entities, it lacked the opportunity sizing of the incremental revenues to be achieved practically and realistically, given the current and projected structure of the Nigerian economy. This also made it difficult to in turn cascade down the revenue to GDP target of 15 per cent by 2023 that was given by the presidency.

“This time around, there are performance targets with consequences for non-performance including the members of the cabinet. For example, I have signed to deliver the 15% revenue to GDP in a performance contract and this will be cascaded down to Heads of revenue generating entities to have them aligned to our mission of turning around revenues. We are in the process of developing a second version of SRGI (SRGI 2.0) with a change in lenses. SRGI 2.0 will be informed by data so we are able to better allocate resources and focus on the high impact initiatives as revealed by analysis. In tune with the fourth industrial revolution, we want a technological led reform. For example, in a bid to leverage available big data in our public sector domain, Project Light House was launched last year and driven centrally at the Ministry of Finance to provide intelligence to the FIRS, state tax authorities and other revenue collecting agencies. On the Customs front, we are in the process of developing our national single window”.

Omoh Gabriel in Washington

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