How VAT hike to finance minimum wage will affect economy, capital market

Matthew Otoijagha

Since the Minister for Budget and National Planning, Udoma Udo Udoma and the Executive Chairman of the FIRS, Babatunde Fowler hinted during an interactive session with the National Assembly that VAT rate is likely to go up to enable government fund the new minimum wage of N30, 000 per month, there has been widespread reactions, including rumors that the FG plans to finance the bill by increasing tax rates [Value Added Tax (VAT), Company Income Tax (CIT) and Petroleum Profit Tax (PPT).

The National Assembly finally passed the bill on N30,000 minimum wage, following agitations from the Nigeria Labor Congress (NLC) amid the alarming rise in cost of living, as well as unprecedented levels of poverty in the country. The new national minimum wage recommended by the tripartite committee that was set up to review the minimum wage.

But considering the weak and shallow revenue base of some states, and considering the fact that some states have been struggling to pay their workers at the current wage rate, the biggest question in the minds of many seem to be “How will a 50% hike in minimum wage be funded and how will the increase affect the economy and the capital market?

Stocks Watch went to town to sample the opinion of stakeholders in the economy, as well as the capital market on likely effect of the increase on Nigerians.

Mr. David Imafidon Adonri, a Stock Broker/ Market Analyst responding to the expected hike in VAT explained that VAT is a form of TAX used by government, just like any other tax, to reduce consumption its citizens. According to him:

‘‘But reducing consumption at this time, when the economy is in bad shape can further hurt the economy. I think this is not the right time to increase tax. For the capital market, it is a dis-incentive to investment, as investors’ savings will reduce, particularly those of fixed income workers.

‘‘In my opinion, this additional tax burden, coupled with already heightened administrative expenses would undoubtedly tighten profit margins for businesses. Furthermore, the increased minimum wage could predicate possible layoffs of workers because of the higher labour cost. Overall, I’m of the opinion that the FG should implement pro-market policies to cushion the likely negative effect of the bill on the ease of doing business in Nigeria.

Beyond the revenue impact, there will be other unintended consequences including: higher inflation, interest rate hike, more unemployment and people will generally become poorer. Without a VAT registration threshold and zero rating of basic consumption it will increase the burden on the poor and SMEs contrary to the 2017 National Tax Policy. Seeking to expand the VAT net while also increasing VAT rate at the same time is a conflicting strategy.

Asked what the federal government should do rather than the seemingly easy way out of raising rates, Adonri said ‘‘the government can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring a robust administration rather than by increasing rate.

This should include a review of VAT waivers, better policing of the border to improve import VAT collection, framework for VAT on imported services and digital economy.

Contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality. In any case the likely increase in revenue will not be sufficient to pay the new minimum wage.

Otumba Dele Ajayi-Smith, former Council Member, LCCI said that manufacturers and businesses were already saddled with so many challenges, such as infrastructural decay, power, among others.

“The review of VAT, as being proposed, is not the only option opened to government to fund the new national minimum wage. Besides, the planned increase would erode the gains of minimum wage for low earners, and further weaken their purchasing power, among others.

“The planned increase of VAT will have far-reaching implications for manufacturers, businesses and consumers alike. Some companies are closing shops due to some of these challenges while others are still struggling to stay afloat.

‘‘The proposed increase in VAT would definitely lead to an increase in the cost of doing business, and would likely be passed to the consumers whose purchasing power is already weak. Government does not have to increase VAT in order to enable it pay minimum wage. However, in the event that government must increase VAT against the will of the people, it should be limited to luxury or ostentatious goods only.’’

He faulted the comparison of VAT rates with other countries as being irrelevant due to the fact that business operating conditions in those climes are more clement than what obtains in Nigeria. He advised that government should reduce its recurrent expenditure, cost of governance, widen the tax net in its bid to generate more revenue and ensure effective collection of taxes from non-compliant citizens or defaulters, etc.

 

According to Ajayi-Smith, ‘‘Government should not burden businesses with taxes, rather it should create an enabling environment for businesses to thrive and continue to contribute to the growth of the nation.”

Mr. Ndata Samuel.W. (Director), UIDC Securities Limited said, ‘‘in fairness to the government, I think the authority is trying to be careful, as they are exploring ways on funding the minimum wage issue. This is because the federal government is the biggest employer of labour and as it is important for them to find a sustainable way to carry the burden of the huge wage bill.

However, I expect the government to take some decision that would cushion the impact of increment in VAT from 5% to 10%, especially on manufacturers. I know of some countries where government take as much as 15% on VAT. I think that what the government plans to do requires some understanding from all Nigerians.

In the area of capital market investing, do not see how the planned increase of VAT will hinder workers who really want to invest from doing so.

Speaking in the same vain, Mr. Aruna Kebira, a Stockbroker and market Analyst in his opinion said the plans by government to increase VAT by 50%, following increase in national minimum wage tantamount to robbing Peter to pay Paul: ‘‘Following the increase in national minimum wage from N18000 to N30000, I think plans to hike VAT tax is like giving with the right hand and taking with left hand from Nigerian workers.

‘‘The implication of this is that the Nigerian workers will be at the receiving end. Such action would erode the economic benefits that could have accrued to consumers and the economy in general. The increase will also savings difficult for the work force, as the price of goods and services would go up.

Kebira also argued that the increase could lead to substitution of consumer goods, as consumers of manufactured food items might be forced to seek alternative, in the event of high food prices. He said he does not envisage that the VAT increase would have any significant effect on the capital market.

Timothy Olawawale, DG, Nigeria Employers’ Consultative Association (NECA)Speaking at an employers’ forum on Friday in Ikeja, also warned that increasing VAT after approving a new wage would have far-reaching implications for the economy.

He argued that apart from weakening the purchasing power of workers, an increased VAT would impact negatively on manufacturers and businesses, which he said, were currently struggling for capacity utilization.

“The planned increase will erode the gains of the minimum wage for low-income earners and further weaken their purchasing power, among others,” he said. He said that increasing VAT should not be the only option open to government to fund the payment of the new wage.

Mr. Olawale argued further that increasing VAT would wipe whatever gains workers would derive from the new wage, expected to be signed into law by President Muhammadu Buhari.

The NECA chief said that increasing VAT would also have implications for manufacturers, businesses and consumers in a nation where manufacturers and businesses had been saddled with infrastructure decay and power challenges. He lamented that some companies were already closing shops, due to worsening operational challenges while others were struggling to stay afloat.

“The proposed increase in VAT will lead to an increase in the cost of doing business which will likely be passed to the consumers. VAT increase is not desirable at this time. “Government does not have to increase VAT in order to enable it pay a new wage. However, in the event that government must increase VAT against the will of the people, it should be limited to luxury or ostentatious goods only.”

He faulted the comparison by some bureaucrats of Nigeria’s VAT rates with other countries as being irrelevant, pointing out that the business climate in other climes were more conducive than what obtained in Nigeria.

 

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