Experts fume over IMF’s recommendation to raise VAT to 15%
…Increase to worsen poverty, wrong for present economic conditions — Experts
…Forex, energy challenges more essential for govt to address — Muda Yusuf
…Says 100% increase threat to SMEs
…As SMEs calls for grant, tax waiver for manufacturers, reduction of multiple taxes
By Seun Ibiyemi and By Matthew Denis
Outrage has trailed the recent recommendation by the International Monetary Fund (IMF) to the Federal Government, urging the government to raise Value Added Tax (VAT) from 7.5 per cent to 15 per cent.
Business experts have faulted the recommendation, stating it is wrong to have such a policy at a time businesses and citizens are groping with key economic challenges.
The International Monetary Fund (IMF) had recommended to the Federal Government a number of reforms that are critical to creating much-needed fiscal space for economic growth.
The IMF prescribed a package of measures, which are estimated to create fiscal savings of close to 6 per cent of GDP during the period 2023-27 while also making room for higher social spending, and urged the government to undertake bolder fiscal reforms to create policy space.
The Fund advised the authorities to adopt tax policy reforms by considering adjusting tax rates to levels comparable to the average in the Economic Community of West African States (ECOWAS) as compliance improves.
“This includes further increasing the VAT rate to 15 per cent by 2027 in steps while streamlining numerous VAT exemptions based on systemic reviews, increasing excise rates on alcoholic and tobacco products while broadening the base, and rationalizing tax incentives by streamlining tax expenditures based on comprehensive periodic reviews,” it said.
Also, the Fund urged the Federal Government to step up the implementation of tax administration reforms and welcomed the steady implementation of the tax automation system (TaxPro Max).
It recommended stepping up efforts to further expand coverage under a well-designed roadmap and strengthen taxpayer segmentation centering on the Large Taxpayer Offices (LTOs).
“In the medium-term, the authorities should develop a compliance improvement programme and comprehensive customs modernisation programme, improve the effectiveness of the State Internal Revenue Service’s administration of the Pay-As-You-Earn (PAYE) system, and strengthen inter-agency coordination and data sharing,” the IMF stated.
Reacting to the IMF recommendations, Chief Executive Officer, Centre for the Promotion of Private Enterprise [CPPE], Dr Muda Yusuf faulted such move, considering the present economic conditions of the Country, calling rather for attention on critical challenges as Forex and energy deficits.
“This is not possible due to the current situation in the Country.
“Because if we increase VAT this time it is going to worsen the poverty situation. And it’s also going to further complicate the challenges of businesses, particularly the Small and Medium Enterprises (MSEs).
“So, I think at this time what we need to do is to sort out some other more fundamental economic issues like the Forex issue
“I know there is issue about Forex. Let’s sort out our energy issue.
“If we’re able to deal with at least those two, we can now be talking about reviewing VAT and if we are going to review it, it is not to take it up by 100%.
“But as for timing, I don’t think it’s appropriate puting unnecessary burden on both the citizens and Businesses.”
Also speaking on the development, the Deputy National President of the Nigerian Association of Small Medium Enterprise (NASME), Prince Ajisefinni said that “the advice by the International Monetary Fund (IMF) urging the government to raise Value Added Tax (VAT) from 7.5 per cent to 15 per cent is good but the Federal government shouldn’t implement such at this period of hike inflation.”
He argued that the economy is in shambles, therefore, increasing VAT on consumption commodities will have drastic effect on the common masses.
Ajisefinni said, “We second to the IMF that for boost in the economy the rate of country VAT paid by the people should improve. Definitely it will increase our Gross Domestic Products (GDP) but the country is facing a lot of crisis as a result of insecurity. Farmers cannot safely go to farm and turn in their produces, causing inflation.”
He suggested that the government should have a roundabout discussion with stakeholders to fine-tune ways in enhancing the Economy.
“The Government should grant tax waiver on import duty for manufacturers bringing their raw material for production and reduce the multiple taxes for the sector to regain,” he submitted.
Recall that the recommendation is contained in the Staff Concluding Statement of the 2022 Article IV IMF Mission to Nigeria, which was released over the weekend.
The IMF observed that public finance is under stress with elevated fiscal deficits, high debt servicing costs and public debt projected to increase over the medium term.
It noted that despite higher non-oil revenues relative to 2021, the Federal Government fiscal deficit is projected to widen to 6.2 per cent of GDP in 2022, mainly due to fuel subsidy costs.
According to the IMF, “Without bolder revenue mobilisation efforts, costly fuel subsidies and rising debt servicing costs will keep overall fiscal deficits above 6 per cent of GDP in the medium term, raising public debt to about 43 per cent of GDP by 2027.
“While still deemed sustainable, such a level of debt is projected to take up nearly half of the Federal Government’s revenues in interest payments making the fiscal position highly vulnerable to real interest rate shocks. It also leaves little fiscal room for vital social spending on education and health, where Nigeria fares poorly compared to peer countries in sub-Saharan Africa (SSA).
“Urgent revenue mobilisation and fuel subsidy reforms are critical to creating much-needed fiscal space. Successful revenue mobilisation episodes in SSA highlight the need for comprehensive fiscal reforms supported by high-level political commitment.”
Specifically, the Mission recommended, “Remove fuel subsidies and address oil theft. As a near-term priority, the mission highlighted the urgent need to remove fuel subsidies fully and permanently, which disproportionately benefit the well-off, by mid-2023 as planned. The government should also prioritise addressing oil thefts and governance issues in the oil sector to restore production to pre-pandemic levels.”
Also, it advised the government to increase well-targeted social assistance to mitigate food insecurity and cushion the impact of high inflation and fuel subsidy removal on the poor.
The mission recommended increasing social spending by up to 1.7 per cent of GDP during 2023-27 in well-targeted programmes in coordination with the World Bank and other development partners.
Among other recommendations, the IMF noted that fiscal transparency is critical for a sound fiscal policy and that notwithstanding recent improvements, some gaps remain.
“While the authorities have published the annual financial reports of the state-owned Nigerian National Petroleum Company (NNPC) since 2019, uncertainties remain regarding the nature of tax write-offs and fuel consumption volumes,” the IMF stated.
The mission recommended a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including a thorough financial audit, stronger cash management and better coordination among key public institutions as they are needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts.
