Thomson Ayodele : Follies of Raising Tax Revenue

Last year, the Federal Government indicated its desire to raise the Value Added Tax (VAT). To actualise this, it forwarded to the National Assembly a Bill asking it to increase VAT currently at 5% to 10 %. Fortunately for us the Senate acting on sound economic judgement rejected the proposal and it now lies with the House.
Government remains the largest spender in the economy. In view of this it is unclear why the government considered the idea of hiking the VAT. The reason usually associated with such increases in tax is that it would bring in more revenue. However, with the decline in the purchasing power of Nigerians and mounting unemployment figures, the projected revenue from the increase might in the end be a mirage.
The tax burden in Nigeria has contributed to the reason many entrepreneurs are unwilling to invest in the economy. Business outfits have been reeling under plethora of multiple taxes.
According to a recent study by the Nigeria Economic Summit Group, the study concludes that over 80 different taxes are imposed on businesses. However, only 39 different forms of taxes are approved for all tiers of government. The study further finds that most businesses paid between 5% and 10 % of their profit as taxes. Every tier of government levies rates and taxes.
Sometimes, most of the taxes are arbitrary and beyond statutory provisions. The former Industry minister, Bamanga Tukur, recently condemned the current multiple taxes, saying that it is "counter-productive, destroys investment confidence and makes the cost of doing business unnecessarily high."
In addition to a confusing myriad of taxes the Nigerian market is beset with other cost increasing problems; corruption, erratic electricity and a poor infrastructure that inhibits distribution and production.
The result of higher taxes, a complex manner in which they are applied and poor distribution and infrastructure is the encouragement of an informal sector. At the end many entrepreneurs who are in the formal sector would devise way either to totally evade payment or collude with officials to under pay. The Nigerian government loses, we lose and businesses lose in this scenario.
The good news; there are solutions, solutions which have demonstrated their value in other markets and it would be good for Nigerians to start paying attention to these.
To address these issues the first requirement must mean no net loss in revenue to the government. Our education, health care and infrastructure needs require this. Secondly we must encourage the Lower House to do what the Upper House has done, reject the quick fix long-term devastation of a VAT tax increase. Finally to address the simplicity argument we must do what Ghana did late last year, to quote the minister of Finance: Mr Kwadwo Baah-Wiredu, Ghanaian Minister of Finance and Economic Planning announced the 2006/2007 Budget Statement in Parliament on 16 November.
"The rationalisation of the excise tax regime has focused on achieving simplicity in administration and enforcement, ensuring a steady stream of revenue, discouraging tax evasion and smuggling, curtailing the consumption of harmful products and removing the distortions", he said. "Achieving these objectives generally involves a move from the current ad-valorem regime to a specific tax regime that provides scope for differentiation. This shift in policy regime is in line with current international trends and best practices."
Ghana applied this tax regime first on petroleum products earlier this year and now has extended the "specific tax regime" to beer, wine, spirits and tobacco. The reason; fluctuating prices caused by inflation, price changes and an effort by some businesses to hide the true value of their product made the old Ad Valorem tax regime unstable.
This change follows a pattern, South Africa, Kenya, Tanzania and now Ghana are leading the way in Africa. They are comforted by the knowledge that every developed economy as measured by the Organization of Economic Cooperation and Development (OECD) except one uses the specific tax regime.
The decision to increase VAT and the prevailing multiple taxes failed to recognise the potentials of the informal economy which fund is ten times more than the amount of money in the Nigerian Stock Exchange. Continuing with the multiple taxes and increasing VAT to 10 % would ultimately destroy micro and small businesses and further encourage many businesses to remain informal.
Although excise duty is an ad valorem tax, brewing industry excise duty was reduced in 2002 from 40% to 20 % per liter of alcohol. This benefited the industry in general in terms of expansion and job creation. Between 2000 and 2005, that reduction alone enables the industry to attract foreign investment worth over $800 million.
When the National Assembly convenes to deliberate on the Tax Bill, it should as a matter of urgency reduce tax burden on businesses. It should provide for a one-stop system for payment of taxes. Given the high cost of doing business, reducing tax burden would go along way to boost enterprise’s profits and act as an incentive to attract other potential entrepreneurs. Smaller percentage of informal businesses spring up in countries with higher tax revenues that are achieved by lower tax rates which result in greater compliance.
It is incumbent on the National Assembly to review and change the way alcohol industry is taxed. Ad valorem tax regime must pave way for specific tax. What many people might be tempted to say is that specific tax leads to budget deficits. This is not true. South Africa and Kenya saw their revenues rise after switching to a specific regime.
However, a high tax regime and a regulated economy combined with weak and discretionary administration of the law does not enable private sector to flourish. These also create the conditions under which corruption thrives.
During the deliberations, members of National Assembly must be guided by the famous words of John F. Kennedy: "It is a paradoxical truth that tax rates are too high and tax revenue are too low and the soundest way to raise revenues in the long run is to cut the rates now".
Thompson Ayodele is the Director of a Public Policy think-tank, Initiative for Public Policy Analysis, based in Lagos. He is the author of upcoming publication: Why Informal Business Thrives in Nigeria.


available from the Initiative for Public Policy Analysis at :