Thursday, January 29, 2015 4.44 PM / By Olumide K. Obayemi
We examine the policy considerations regarding the Nigerian federal government’s plans to double the rate applicable under the Value Added Tax Act, Cap V1 LFN 2004 (VAT) towards avoiding the need to cancel several government projects if oil prices continue to slide. According to the Coordinating Minister for the Economy/Minister of Finance, Dr. Ngozi Okonjo-Iweala in an interview with The Wall Street Journal, the country is reviewing some 6,000 ongoing capital projects to see which will be kept, delayed, or scrapped:
“It will be a huge exercise. If oil prices continue to sink, it will also raise its value-added tax, which at five per cent to 10 per cent.”
While we agree that the government may raise revenue towards improving the public infrastructure, the VAT is not a user fee, but a tax on goods and services which cannot be used to fund a benefit being conferred on the taxpayer. Second, we are against the imposition of additional taxes through executive fiats or pronouncements. The VAT, being a federal legislation can only amended by the Federal Legislature.
In recent times, oil prices have dropped from $102 a barrel in June to $40 within the last week in mid-January 2015. In fact, experts have attributed the price drop to a glut of oil on the world market due to two (2) major causes: (a) the result of hydraulic fracturing—fracking in the United States and (b) an oversupply of petroleum from oil producing nations in the Middle East — most notably Saudi Arabia.
The Nigerian situation is even more dire, because the country’s drop in oil income is coming just as spending is rising. In a nation of 174 million people, its involvement in a costly war against Boko Haram, an Islamic insurgency that has conquered a Belgium-sized swath of its north-east, while forcing the military to purchase new helicopters and tanks to respond has stretched the Nigerian financial purse greatly. More serious is the fact that in March 2015, Nigeria is scheduled to hold the country’s closest general election ever. It is in this context that the current cascading oil prices has occurred that has now pushed the local currency, the naira, to a record low N190 to a dollar in January 2015.
Nigerian economic planners are now caught at a frenetic pace of keeping the economy under control, i.e., towards building a budget that would reflect a realistic assumption on where crude prices will stand, because Nigeria’s 2015 budget initially assumed oil would trade at $78 per barrel, a projection that he Nigerian finance ministry initially cut to $73 in November and then again to $65 in December. Finally, on Tuesday, prices for Brent crude settled just below $48 per barrel. The downwards slide has led the Nigerian finance minister to opine that:
“We don’t know where the bottom is. Should it be $50? Should it be $45? Should it be $40? Is the bottom $30? I have no idea. The country will hold off on issuing a new budget with a revised oil price benchmark until crude prices stabilize.”
Nigeria is not alone in the current financial imbroglio flowing from the downward oil price. When California Governor, Mr. Jerry Brown unveiled his 2015–16 budget proposal in January 2015, he had noted that California needs to spend about $59 billion to catch up on necessary maintenance and upgrades of roads, bridges, and other transportation projects. The governor's budget, however, allocated no funds for these much-needed projects, because he said the state has no extra money to spend. But Brown may be overlooking one avenue for financing the state's transportation needs: a gas tax increase. Similarly, like California, the United States federal government does not have enough tax revenues to repair the nation's crumbling infrastructure, with the US Highway Trust Fund, which is funded by federal gas taxes, slated to run out of cash in May 2015. In fact, according to the nonpartisan Congressional Budget Office, the federal government is looking at a $100 billion hole in transportation funding over the next five years.
What is evident, unlike Nigeria is that the United States is looking to increase gas taxes, which are user fees and, certainly, not looking to increase the VAT. In the US, the federal gas tax rate is $0.18.4cents, while the California state gas tax is pegged at $0.39.5cents
It is in this context that the Nigerian government’s effort to raise revenue, while salutary, offends the canons of taxation rules by seeking to raise VAT rates from 5% to 10%.
VAT is not a user fees, but a tax imposed on goods and services. Tax can be described as a compulsory contribution imposed by the government, and it is a source of income to government paid by the tax payer and used by the government for the benefit of all citizens. It is not levied in return for any specific service rendered by the government to the tax payers. According to the Institute of Taxation and Economic Policy, which tracks tax policies nationwide, it supports higher gas taxes towards paying for road projects. In the words of Carl Davis of the Institute of Taxation and Economic Policy:
“[Since] Gas taxes are user fees: If motorists want better highways to drive on, then it makes sense that they — not folks who walk, bike, or take mass transit to work — should pay to fix them. That's a specific advantage that gas taxes have."
No doubt, user fees are levied in return for specific service rendered by the government, it would be wrong for the Nigerian federal government to confuse VAT with levies and argue that since it needs money to execute road and infrastructure projects, the Nigerian government must raise VAT. While Nigeria may raise toll gate fees and other vehicular licenses, raising VAT would be out of question. VAT is also not a Fee, which is a payment to defray the cost of each recurrent service undertaken by the government, primarily in the public interest, but conferring a measurable special advantage on the fee payer, example of fees are court fee, registration fee of property or marriage. To better understand the difference between VAT and other fees, a Licence fee is charged by public authority to grant permission to a person to perform service, and the aim of licence fee is to exercise state control over certain categories of activities or services. Examples of licence fees are motor vehicle licence fee, broadcasting fee e.t.c. Since VAT is not a user fee, it cannot be used as a means of directly raising revenue to construct capital projects.
Second, we argue that the era of executive pronouncements, without legislative amendments towards increasing taxes are ancient relics. Thus, the recent pronouncement on the increase in the Value Added Tax (VAT) from 5 percent to 10 percent, and the controversy that such would generate among stakeholders must be considered. Nigeria as a nation with federal political structure has a fiscal regime that adheres strictly to the same principle, a fact which has serious implications on how the tax system is managed. Further, since “taxation with representation” is now the global trend, all stakeholders must be consulted into this VAT rate increase by widespread enlightenment campaign, so as to foster high rate of compliance.
Even if VAT can be taken as a user fee, a bill to amend section 4 of the VAT Act changing 5% therein to 10 percent should be introduced to the National Assembly soon for passage into law so as to avoid any controversy.
Also, it is also imperative for government to always consider taxpayers’ and other key stakeholders’ interests in fiscal policy formulation and implementation in order to achieve improved tax compliance rate in the country.
In other words, since taxes are statute-derived, government should encourage far-reaching consultation across the broad spectrum of the economy in tax law formulation. Adequate time and resources should be committed to the legislative process in order to have tax laws that are easily implementable. In this regard, the powers of the National and States Legislative houses should be left sacrosanct in line with the provision of the 1999 constitution. Any attempt to fast-track the process by any Executive fiat as the recent VAT issue as demonstrated would only be counter-productive.