2015 PROPOSED VAT INCREMENT: IT’S EFFECT ON NIGERIAN BUSINESSES

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On 18th December 2014, the Coordinating Minister of the Economy and the Minister of Finance Dr. Mrs. Okonjo Iweala, laid the proposed budget before the House of Representatives and National Assembly called the transition budget and part of its parameters to generate revenue from taxes is the proposed increment in vat rate from 5% to 10%.

Looking into value added tax as a major factor in the contemporary world, it is a major source of government revenue in the past years and even in recent times, therefore resulting in strong enforcement for recovery and tax compliance on the part of the tax regulators and government agencies. from the perspective of the buyer, value added tax is a tax on the purchase price of goods and services known as input vat and to a seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution known as output vat. The manufacturer remits to the government the difference between these two amounts, if output vat is more than input vat and if otherwise the difference will be vat refundable.

Extracts from the overview of the proposed budget of the minister, it was said that it will be important to focus on tax policy to see where opportunities lie to streamline and rationalize certain taxes and levies whilst looking to boost others. For example, Nigeria has one of the lowest vat rates in the world and medium term efforts must involve the legislature to see what opportunities exist with vat which largely benefits states. Whilst state governments get 85% of vat, the federal government gets just 15%. A 5% increase in vat rate for instance would yield N614 billion, most of which would go to the states and local governments. It is gain saying to note that a large chunk of this proposed income from vat will be paid by the masses which have businesses that is still struggling for survival in the economically harsh situation as the burden of it falls on personal end-consumers of products.

This proposed increase will be very unfair to the Nigerian populace if it is based on the fact that the rate of vat which is 5% as stipulated in section 4 of the vat act 1993 is one of the lowest rates in the world, as claimed by the minister.

Studies have shown that other countries with higher rates like United States and South Africa have got a lot to show for it, in terms of good infrastructural facilities and social amenities in the country that is adequately sufficient and highly beneficial to the present citizens and their future generations

This is seen to be a severe austerity measure on the masses in the long run, considering the fact that every individual in the country has to consume goods and services that are vatable in other to survive, since it is charged on almost all consumable products.

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Highlights of its effect on businesses in Nigeria

• Drastic decrease in purchasing power of money
This will definitely lead to increase in inflation rate, since the government wants to get a chunk of the insufficient disposable income left in the hands of the Nigerian populace, businesses tend to find it difficult to survive the daring situation. Individuals are left with the only option to reduce their spending on luxury, and spend majorly on necessities. There is always an adverse effect on the economy whenever there is a change in fiscal policies aimed at generating more funds for the country.

As a matter of fact, manufacturers who are opportunists, will take advantage of the increase in vat rate, to shoot up their prices even when their goods and services are not vatable under the VAT Act 1993.

• Decrease in level of Savings of individuals

In the business world, the Profits of businesses are either distributed as dividends or ploughed back into the business for expansion, this could generate more funds by identifying various investment strategies and taking advantage of such opportunities. A rational Nigerian is not afraid of giving up something now to enjoy in the future, what then happens in a country that plans more for recurrent expenditure compared to the capital expenditure in her proposed budget after getting all the increases in revenue including oil and non-oil revenue sources, expending a larger amount on recurrent expenditure. The future plans are so shallow jeopardizing

• Possible closure of infant industries
A higher percentage of businesses in Nigeria despite the long years of existence are still struggling to survive due to the dwindling economic situation of the country, and increase in VAT rate, makes it harder for them to survive, since operating expenses consumes a larger part of the revenue, and individuals are left with the option of providing for themselves what is meant to be provided by the government for them to continue in business. It is pertinent to note that a manufacturer battling with little or no profit, will find it unbearable paying the increased tax on their meagre profit.
This will possibly result in unemployment, as it is already discovered that some of our graduates are responsible for the crimes in the country, as they are one of the social groups always at the receiving end of the bad economic policies.

• Adverse effect on investments

From the budget estimates N634billion has been proposed to be expended on capital projects, which will be largely funded through huge borrowing thereby having an adverse effect on debt servicing costs. Using debts to finance investments is like pouring water into a basket, in that the debt servicing costs, will take its toll on the profits generated on such investments.

Businesses and individuals will have their fill of the adverse effect of the VAT increase since the disposable income left in their hands will be insufficient for present necessities needless to mention investment, in the tough economic environment.

Businesses have to deal with a myriad of issues and overcome many hurdles to become established and remain afloat considering the points highlighted.

In conclusion, it is therefore advisable to business owners to factor in these stringent government policies into plans, transform them to easily decipher opportunities embedded in them. The survival of businesses in 2015, cannot be over emphasized, for it to overcome the severe terrain of operating costs in the long run and the new tax policies about to be unraveled.

ARTICLE BY: ADELEKE ADEOLUWA ABIOLA
DESIGNATION: TAX CONSULTANT

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