Manufacturers’ rage over proposed VAT hike

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Manufactruing

Thursday, March 28,2019

Nigerian manufacturers, under the aegis of Manufacturers Association of Nigeria (MAN), have warned the Federal Government that the proposed increase in Value Added Tax to 50 per cent will kill the country’s manufacturing sector and economy in general.

As at today, it is generally believed that the Nigerian economy is still basking in uncertainty amid the just concluded general elections in the country.

In such uncertainty, it is also shocking that the Federal Ministry of Finance recently pronounced a likely increase in the country’s VAT rate by 50 per cent.

Precisely, it was reported that this recommendation was ventilated on the floor of the Senate by key officials of government while defending the Medium-Term Expenditure Framework (MTEF).

The proposed increase has, however, been denied in a signed statement by the Director, Communication and Servicom in the Federal Ministry of Finance, Wahab Gbadamosi, as well as the Federal Inland Revenue Service.

However, since the reported news on the increase and the likely effect on the country’s fragile manufacturing sector, MAN said the sector could not withstand such policy in all ramifications.

 

MAN’s reaction

The Director-General, MAN, Segun Ajayi-Kadir, while reacting to the possible increase in the country’s VAT, in Lagos recently, said MAN would resist such move, which, according to him, is not manufacturing-friendly and also not in tandem with the Economic and Growth Recovery Plan (EGRP).

Ajayi-Kadir explained that the proposed VAT increase appeared not to have taken into cognisance the prevailing times and the on-going government efforts to reinvigorate the economy.

He added that implementing it at this time would boomerang on the country’s economy severely in which key sectors have been affected.

He said: “As plausible as the recommendation to increase VAT may look, implementing it at this time would boomerang because the timing is inappropriate, especially at a time when the minimum wage of N30,000 was just agreed upon.

“This could send a wrong signal that government is not sensitive to the plight of the low- and middle-income earners, who are clearly in the majority.

“It is also a case of government simply taking back what was given with the right hand through the national minimum wage with the left hand through 50 per cent increase in VAT”

 

Implications

According to MAN, in terms of misery index rating, low per capita income, heavily lopsided income distribution pattern, the Nigerian economy will be in a more vulnerable state if VAT is increased at this period.

The association stated that the burden of the tax would be shifted to consumers that are already struggling, adding that the economy would certainly experience demand crunch, inventory of unsold items would soar, profitability of manufacturing concerns would be negatively impacted and many factories will witness serious downturn, including wind down operations.

The association noted that this would also worsen the already high unemployment position of the country, which is above 23 per cent as Nigerians currently employed by manufacturing concerns and other businesses may join the reserved army of unemployed and further bloat the unemployment rate in the country.

 

 

Concerns

Speaking further, the director-general noted that MAN as a strategic stakeholder in the nation’s development agenda, appreciated the need for government to generate more revenue to fund its developmental initiatives amidst declining revenue from oil.

It, however, suggested that government should thread with caution in the drive for improved revenue for the following reasons, namely the economy recently exiting recession with the fragile growth rate of less than two per cent recorded in 2018 and be delicately managed, precarious macroeconomic condition of the country requiring palliatives that would improve investment and not higher tax burden, prevailing high lending rate, double digit inflation, low per capita income, high unemployment rate and a low 1.91 per cent growth rate amidst 2.6 per cent population growth rate that are already cumulatively limiting competitiveness could be further worsened, among others.

 

VAT comparison

The association’s director-general explained that there was no doubt that VAT is an important revenue source to government for running the affairs of the country optimally.

But, however, the principle of a good tax system is predicated on payment convenience, otherwise it could boomerang, leading to crowding out of businesses; more misery to the citizens and even lesser revenue to the government, he insisted.

Ajayi-Kadir stressed that the Nigerian economy had consistently ranked top in Africa with only South Africa presenting a fair challenge.

According to him, years back, following the economic feat and potential of the country, it assumed an emerging economy status like China, India, Malaysia, Turkey and South Korea. However, he said that it was only South Africa and Egypt made this economic bracket in Africa.

“It is important to state that on economic front, Nigeria should ideally be compared with the emerging economies and not just any country in Africa. Comparative economic policies should be predicated on what obtains in this economic frontier.

“Therefore, an ideal tax policy should be such that takes into cognizance the status of the economy. An ideal VAT policy for Nigeria should take into account the current profiles of Nigeria’s Per Capita Income (PCI), national minimum wage and global competitiveness.

“PCI and NMW will help highlight what will be the implication of upward review of VAT on the already depleted wellbeing of majority of Nigerians, while Global Competitiveness will present insight on the impact of such review on the real sector, particularly manufacturing sector.”

 

Last line

Nevertheless, Nigeria remains a potentially robust economy with a large market, abundant natural resources and a productive population. There is, however need for government to soft pedal on its intentions to jerk up the country’s VAT rate to 50 per cent at this period because of its implications on real sector and the economy in general.

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