Unlike most advanced and developing countries, where the bulk of tax receipts are generated from collection of Value-Added Tax (VAT) the reverse is the case in Nigeria, where the tax-to-GDP ratio is poor. In this report, Ibrahim Apekhade Yusuf examines the issues
With over 35 million taxpayers currently in the nation’s tax net, revenue generation through taxes may have risen significantly. But the irony, however, is that the receipts from collection of Value-Added Tax (VAT) still leaves nothing to cheer about as it contributes a paltry one per cent to the nation’s Gross Domestic Product (GDP).
What VAT is all about?
According to the Federal Inland Revenue Service (FIRS), VAT is governed by Value Added Tax Act Cap V1, LFN 2004 (as amended). VAT is a consumption tax paid when goods are purchased and services rendered. It is a multi-stage tax borne by the final consumer. All goods and services (produced within or imported into the country) are taxable except those specifically exempted by the VAT Act. VAT is charged at a rate of 5%.
A view of the VAT ecosystem
The National Bureau of Statistics, NBS, had last year released the sectoral report for Value Added Tax for the 2017 fiscal period, stating that the country generated a total of N972.34bn from VAT.
An analysis of the VAT report showed that the amount was collected from 28 sectoral activities during the period under review.
A breakdown of the amount showed that the sum of N204.77bn was generated in the first quarter while the second, third and fourth quarters recorded N246.3bn, N250.56bn and N254.1bn, respectively.
In the report signed by the Statistician General of the Federation and Chief Executive, NBS, Dr. Yemi Kale, the bureau said the manufacturing sector generated the highest amount of VAT revenue at N119bn.
This was closely followed by the professional services sector with N87bn.
The report read in part, “Sectoral distribution of VAT data for Q4 reflected that the sum of N254.1bn was generated as VAT in Q4 as against N250.56bn in Q3 and N207.35bn in Q4 2016, representing 1.41 per cent increase quarter-on-quarter and 22.55 per cent increase year-on-year.
“Out of the total amount generated in Q4 2017, N121.09bn was generated as non-import VAT locally, while N79.44bn was generated as non-import VAT for foreign. The balance of N53.57bn was generated as Nigeria Customs Service import VAT.”
It is, however, instructive to note that 55 per cent of the revenue generated from VAT receipts was being collected from Lagos State while the balance of 45 per cent is being generated from the remaining 35 states of the federation and the Federal Capital Territory.
Rivers, Kano and Kaduna account for six per cent, five per cent and one per cent of VAT collection, respectively.
A peep into Africa
According to new data from Revenue Statistics in Africa released in Addis Ababa at a meeting of tax and finance officials from 21 African countries hosted by the Department of Economic Affairs of the African Union Commission (AUC), the average tax-to-GDP ratio for the 16 countries covered in this second edition of the report was 19.1% in 2015, an increase of 0.4 percentage points compared to 2014. Every country has experienced an increase in its tax-to-GDP ratio compared to 2000, with an average rise of five percentage points.
Making a case paradigm shift in VAT administration
It is the considered view of many that the nation’s tax ecosystem, especially the VAT, needs to be changed to achieve the greater good for all.
One of those who share the view and very strongly too that there is need to shake things up in the VAT space is Omooba Olumuyiwa Sosanya, a renowned accountant.
Speaking in an interview with our correspondent, Sosanya, founding president, Association of National Accountants of Nigeria (ANAN), said at the centre of the issue of dwindling VAT receipts is the problem of inefficiency in the administration of the VAT.
According to him, “The problem is overcentralisation of the administration. VAT is a federal government tax controlled by Federal Inland Revenue Service (FIRS). It is this overcentralisation that leads to inefficiency in the administration.”
In the view of Sosanya, “We should decentralise it and allow the state to administer the VAT. As of now, all the state administers what we call Personal Income Tax. What is being generated on this compare to what could be generated if the states are allowed to collect the VAT is huge.” Pressed further, he said, “Take Lagos State for instance, the total amount of money that is being generated on VAT is over 55 per cent. The FIRS doesn’t have any avenue of determining the genuine turnover from VAT. The Service is overwhelmed in the administration of VAT. Whereas if you allow the state to administer the VAT which is decentralised, each of the state will have time to update their staff to register the chargeable person.”
Most of the accountants, engineers, and consultant companies, he stressed, “Are not collecting VAT. And from my own estimation, about 70-75 per cent are outside the VAT and that’s what brought us to this mess. There is no way we should not be collecting over 800 billion naira monthly. And when this is done, I’m not saying the rate of VAT should be increased because a lot of people have been agitating for that. If we do that, what we get is that the revenue for FIRS will be less because the people will now understand their taking. However, if we expand on it, it will bring more chargeable persons and businesses and that will generate up to N800 billion to N1trillion in a month. Some people will argue that the Ghana VAT is about 20 per cent. This is because the total of Ghana VAT is decentralised. Even if you’re a barbing saloon you’re captured, restaurants are captured, all private sector in Ghana is captured, the same thing obtains in South Africa. The rate of VAT is less in Nigeria and look at the population of Ghana and South Africa, they are about 200 million, so we are supposed to generate more.”
In the view of a tax expert, Bamidele Samson, some of the obstacles hampering the growth of VAT are the problem of inadequate personnel to drive the revenue mobilisation in that space, non-compliance of business owners, lack of transparency, evasion of VAT-able goods and services.
VAT increase likely soon
Nigeria is working on modalities to increase VAT on some items which include carbonated drinks and other luxury items in 2019.
Giving insight on the planned VAT rate, Finance Minister, Hajia Zainab Ahmed, says the increase will help the government in providing infrastructure for its people.
The minister stated this recently at the inauguration of the Strategic Revenue Growth Initiative in Abuja.
Writing in her twitter handle, @ZShamsuna, the minister said, “Revenue enhancement has become a critical challenge in terms of the need to mobilise fiscal resources to deliver on our socio-economic development targets as in the ERGP & @NGRPresident has mandated us to generate more revenues, whilst proactively monitoring collections.
“Given the current fiscal terrain & revenue outturn performance – with the realisation of our budgeted revenue at about 50% as at Q3 2018, we have quite a distance to transverse to achieve the ERGP’s target of a tax to GDP ratio of about 15%.”
It is, however, not the first time the federal government will raise duties on luxury goods. In December 2016, the government raised duties on luxury goods and beverages imported into the country under the Economic Community of West Africa’s (ECOWAS) Common External Tariff (CET) regime.