Recently, the Federal Government of Nigeria made her intention known in a bid to increase “Revenue Drive” that TAX-GDP Ratio is an option to consider to increase “Revenue”.
This pronouncement by the Federal Government has generated a lot of faceoff within and outside Institutions of learning as some either argue ‘For’, or ‘Against’ the intention of the Federal Government.
Let us Read: Dr. Bernard Ojonugwa Anthony, An Economic Analyst.
” Drawing our attention to the statistical evidence displayed by the Nigerian government through the media presenting Tax-GDP ratio of some countries such as Ghana, Uganda, Swaziland, Cameroon Rwanda as 15.9%, 10.8%, 15.3% and 16.7%, respectively against Nigeria tax to GDP ratio of 6.1% as a measure to justifying the proposed sporadic increase in VAT from 5% to 15% or more is considered as a yardstick in error.
The fundamental questions that come to mind are: what is the disposable income of those countries? What is the standard of living vis-à-vis their level of income? Why is Tax-GDP ratio a contending factor and a justification for increasing VAT without considering the economic growth base of the country as Tax-GDP ratio of a country may be determined by the base value of GDP of a country? That is the GDP value of country could bring about a higher or lower value in Tax-GDP ratio? What is the GDP of Nigeria compared to that of those countries?
Some Tax experts argue that the proposed VAT increase is a strategy for diversifying Nigerian Economy against the present Monoculture Economy.
An Economy solely dependent on oil is prone to economic collapse as oil is a none-renewable resources therefore, there is the need for urgent approach to tax based economy, hence, the need for VAT increase.
Is this position true for an Economy like Nigeria that require an investment induced policy?
Anyway, what is value added tax (VAT)? It’s known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally, based on the increase in value of a product or service at each stage of production or distribution.
VAT essentially compensates for the shared services and infrastructure provided in a certain locality by a state and funded by its taxpayers that were used in the elaboration of that product or service.
In Nigeria, it is popularly known as consumption tax. As the name implies, it is a tax imposed on the value of a product or services at each stage of production.
Though, this tax is completely different from personal income tax.
Nevertheless, VAT is paid from income earned by individuals or household.
The argument is, what is the likely implication of increasing VAT in an emerging Economy like Nigeria?
The economic squad that brought about the decision of increasing VAT as a means of generating revenue amidst the current demand for minimum wage increase should have considered its implication on domestic and direct investment in Nigeria.
Simple economic theory by the neo-Keynesian school expresses that disposable income is a restorative of aggregate demand which in turn stimulate investment in an Economy.
Thus, a country facing precarious economic crises characterized by geometric increase in unemployment and misery requires an investment moving economic policy which can only be realized by encouraging disposable income.
An increase in disposable income in Nigeria will in both short and long term encourage house hold savings, hence investment.
I see contradiction, for the government of Nigeria to encourage SMEs via her social investment scheme and other agricultural policies and still plan increase in tax on consumption (VAT).
This is a contradiction in SMEs planned economy. A low disposable income arising from increase in VAT will lead to dissaving and further discourage SMEs investment as a result of fall in aggregate demand.
My candid advice, government of Nigeria should appreciate a comparative industrial or manufacturing favoured economic policy to encourage employment creation, personal income generation before implementing a sporadic increase in VAT as a means to generate fiscal revenue.
A comparative manufacturing economic policy in most cases favours an Economy endowed with abundant natural resources.
Such Economy policy encourages the manufacturing of goods and services whose comparative advantage ratio (CAR) is higher than other competitive Economy and rely on importation of those goods whose CAR is relatively less.
Do we need to ask if Nigeria is endowed with the required resources?
Obviously the answer is NO because it is an obvious fact that Nigeria is endowed with natural resources that placed our CAR above other countries in Africa and the world over.
Finally, I further advised that the decision to increase VAT should be done with some guided principles and encourage policies that could encourage aggregate demand, increase productive base which will in turn increase employment and increase household income.
In this case, VAT increase will obey the simple principle of convenience in taxation”.
Dr. Bernard Ojonugwa Anthony (Ph.D) NAEE, IAEE
An Economic Analyst, On Both Contemporaries & Academic Issues.
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