Irrespective of the angle from which the tax is viewed, the purpose of VAT is to generate revenue to the government in the same way that corporate tax or personal income tax does.
From the distribution formula enunciated in the first part of this piece last week, it is clear that VAT is designed to favour development at the lower-tier level. The tax has been successful in a number of countries, especially where personal income tax or corporate tax has been weak. In Nigeria, since its introduction, VAT has recorded significant success. For example, in 1994, one year after its introduction, VAT yielded N7.3 billion revenue. This increased by 184.9 percent to N20.8 billion in 1995. As at 2013, VAT revenue stood at N795.6 billion and it was distributed to the tiers of government in line with the above formula. The challenge, however, is that the VAT rate has remained unchanged at 5.0 percent since the introduction. And it is one of the lowest rates in the world. Some European Union (EU) countries and non-European countries have VAT rates as follows:
EU countries: Austria 20 percent, Belgium 21 percent, Bulgaria 20 percent, Denmark 25 percent, Finland 24 percent, France 20 percent, Hungary 27 percent, Latvia 21 percent, Netherlands 21 percent, and United Kingdom 20 percent.
For non-EU countries, Albania has 20 percent VAT rate, Argentina 21 percent, Australia 10 percent, Bangladesh 15 percent, Chile 19 percent, People’s Republic of China 17 percent, Egypt 10 percent, Ethiopia 15 percent, South Africa 14 percent, Russia 18 percent, Norway 25 percent, and Nigeria 5 percent. Others are Ghana with 15 percent VAT rate, Guyana 16 percent, Indonesia 10 percent, Taiwan 18 percent, Tunisia 18 percent, Israel 18 percent, Japan 8 percent, India 5 percent, Malaysia 6 percent, Mexico 16 percent, Mauritius 15 percent, Namibia 15 percent, and Morocco 20 percent. (Source: Wikipedia)
What is clear from the above is that many countries have standard VAT rates in the range of 10-25 percent and they are able to realise substantial revenues while de-emphasising the rate of income tax and placing preference for indirect taxes. Only very few countries have very low VAT rates, e.g., Nigeria, India and Malaysia. Indeed, a few countries are VAT-free, for example, the USA, Libya, Saudi Arabia and Hong Kong. However, sales tax is common in some US states.
But then, Nigeria’s situation is different: its fiscal position is weak. The expectations from the incoming government are very high in terms of development programmes, projects and social services while the revenue position is precarious. The success of the incoming government will depend on its ability to mobilize adequate revenue needed to bring succour to the citizens. The oil revenue upon which the country has depended heavily for so long has failed at this point in time, more especially as past oil earnings had been squandered leaving no fiscal buffers. The government from now on must learn to rely on tax revenue which is a most predictable and sustainable source of revenue for other well-governed countries.
It is not that VAT does not have its challenges. Sometimes VAT revenue may be lower than expected because of high collection and administration costs. Nevertheless, VAT has become quite important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization; VAT has essentially replaced lost tariff revenues. It is true that increased VAT that is passed on to the consumer will increase the prices of goods and services. Indeed, the burden of the tax falls on the personal end-users of the products. And some have argued that the tax is regressive, implying that the poor pay more as a percentage of their income than the rich. However, it is possible to maintain the progressive nature of the total taxes on individuals where the country implementing VAT reduces income taxes on lower income earners as well as institute direct transfers to lower income groups, resulting in lower tax burdens on the poor. This ameliorating policy stance should actually be considered by the Nigerian government if the VAT rate is increased.
In conclusion, the incoming Federal Government should seriously consider increasing the VAT rate to at least 10 percent. This will be a desirable first step on the path to making the country rely more on tax revenue to achieve sustainable development. The current fiscal crisis provides an opportunity to take the hard decisions which will enable the new government to take off but which will be beneficial over the medium-to-long term. The majority of Nigerians exhibit a high level of understanding and tolerance. Their needs are very limited – a few basic things: education, jobs, reasonable income, good health services, housing and basic infrastructure. They will cooperate with a leadership that can be trusted with their resources, leads by example and is committed to their welfare and progress. They know that the incoming government is not a magician. It needs revenue to meet various expectations. And they are most likely to cooperate with the government even if the measures entail short-term hardships.
Mike I. Obadan
