With the total of N2.94 trillion income generated from value-added tax (VAT) and company income tax (CIT) alone in 2020, indications are that the nation’s revenue projections from VAT in 2021 may rev up the economy in dire need of a lifeline, reportsIbrahim Apekhade Yusuf
To say the nation is in desperate need of a lifeline is certainly stating the obvious. With receipts from oil revenue not completely a sure bet, no thanks to the unstable oil prices at the global market and the ravaging COVID-19 pandemic, the economy can in a manner of speaking do some help.
In search of additional streams of incomes
Unlike most advanced and developing countries, where the bulk of tax receipts are generated from collection of Value-Added Tax (VAT) the reverse is the case in Nigeria, where the tax-to-GDP ratio is poor.
With over 35 million taxpayers currently in the nation’s tax net, revenue generation through taxes may have risen significantly. But the irony, however, is that the receipts from collection of VAT still leaves nothing to cheer about as it contributes a paltry one per cent to the nation’s Gross Domestic Product (GDP).
What VAT is all about?
According to the Federal Inland Revenue Service (FIRS), VAT is governed by Value Added Tax Act Cap V1, LFN 2004 (as amended). VAT is a consumption tax paid when goods are purchased and services rendered. It is a multi-stage tax borne by the final consumer. All goods and services (produced within or imported into the country) are taxable except those specifically exempted by the VAT Act. Recall that VAT was increased from five per cent to 7.5 per cent as contained in the Finance Act 2019. The increase took effect on February 1, 2020.
Overview of current VAT ecosystem
Nigeria generated a total of N2.94 trillion in income from value-added tax (VAT) and company income tax (CIT) last year, data released by the National Bureau of Statistics (NBS), has revealed.
In the report signed by the Statistician General of the Federation and Chief Executive, NBS, Dr. Yemi Kale, the bureau said the figure is about 10 per cent higher than the N2.68 billion recorded the previous year.
The breakdown shows that the third quarter (Q3) recorded the largest performance with a total of N840.7 billion while N620 billion, the least quarterly performance, was recorded in Q1.
VAT accounted for N1.53 trillion or 52 per cent was the total figure, N1.41 trillion was sourced from CIT. The CIT income is 13.5 per cent short of the N1.63 trillion generated from the same source in 2019.
The 2020 CIT income was distributed accordingly: local companies (N750.5 billion), foreign CIT payment (N380.8 billion), and others (N238.1 billion.)
Professional services (including telecoms) and banks/other financial institutions led last year’s CIT revenue drive with N180.3 billion and N96.4 billion respectively. While banks and other financial institutions’ contribution to the CIT fell by about 48 per cent (compared to N142.7 billion realised from the sector in 2019), professional service improved slightly, rising from N177.7 billion generated from the sector in 2019 to N180.3 billion.
Other top contributors to CIT incomes are other manufacturing (N80.2 billion), commerce and trading (N65.6 billion), breweries, bottling and beverages (N53.2 billion), state ministries and parastatals (N49 billion), transport and haulage (N45.5 billion), oil-producing (N40.8 billion) and federal ministries and parastatals (N22.5 billion).
The laggards were the textile and garment industry (N360 million), mining (N343.2 million), local government councils (N1.1 billion), chemicals, paints and allied industries (N2 billion) and publishing, printing and packaging (N2.1 billion).
Textile and garment recorded highest year-to-date (YTD) improvement with 100 per cent jump in its CIT generation while the contribution of petrochemical and petroleum refineries fell by 45 per cent YTD to top the least improved sectors.
In the fourth quarter, the country generated N454.7 billion from VAT, making it the top-performing quarter. The first quarter was the poorest with 324.6 billion. The pattern was different from that of 2019, when the Q2 topped the year followed by the fourth and then first.
According to sectoral analysis sourced from the NBS data, the government received N763 billion from non-import (local) VAT, N420.4 billion from non-import (foreign) VAT and N347.7 billion from the Nigeria Customs Service (NSC)-import VAT.
Professional service recorded N162.3 billion to emerge as the top contributing sector followed by other manufacturing with N154.2 VAT revenue. Mining recorded N251 million to take the least position in terms of value addition to VAT revenue.
Nigeria’s 2020 budget had targeted a VAT remittance of N2.03 trillion, but only earned N1.53 trillion, a 29 percent increase compared to N1.18 trillion generated in 2019.
Analysis of the NBS Sectoral Distribution of VAT showed in the fourth quarter that 24 of a total of 28 sectors recorded positive growth in VAT remittance, while four sectors recorded a decline in the period.
Compared to 2019 where all sectors posted an increase in VAT remittance from 2018.
The four sectors’ decline in remittance performance might have cost Nigeria N590 billion in revenue using 2019 VAT of N1.18 trillion, added to the 50 percent VAT increase in 2020.
Pioneering services sector recorded a 92.32 percent drop in remittance from N10.27 billion in 2019 to N8.65 billion in 2020.
Federal Ministries and Parastatals declined by 24.53 percent to N26.26 billion compared to the 34.8 billion VAT remittances in 2019.
Local Government Councils remittances also dropped by 10.84 percent to N1.90 billion compared to N1.96 billion in 2019.
The Textile and Garment industry completed the list with a 41.95 percent drop to N1.19 billion from N1.47 billion in 2019.
On the flip side in 2020, professional services generated the highest amount of VAT with N162.32billion remittances, overtaking other manufacturing which raked in the highest VAT of N124.14 billion in
2019.
VAT remittance from other manufacturing sectors came second at N154.15 billion. Non-import VAT generated locally grew by 30.5 percent in 2020 to stand at N763.01 billion as against N584.6 billion received in 2019.
Non-import foreign VAT also stood at N420.4 billion an increase of 17 percent when compared to N359.5 billion generated in the previous year.
Import VAT generated by Nigeria Customs Service jumped by 44.6 percent to stand at N347.7 billion as against N240.5 billion recorded in 2019.
VAT remittance by the transport and haulage services sector grew significantly by 78.8 percent to stand at N43.5 billion, closely followed by the agricultural and plantation sector with a 65.4 percent increase to stand at N4.34 billion.
A peep into Africa
According to new data from Revenue Statistics in Africa released in Addis Ababa at a meeting of tax and finance officials from 21 African countries hosted by the Department of Economic Affairs of the African Union Commission (AUC), the average tax-to-GDP ratio for the 16 countries covered in this second edition of the report was 19.1% in 2015, an increase of 0.4 percentage points compared to 2014. Every country has experienced an increase in its tax-to-GDP ratio compared to 2000, with an average rise of five percentage points.
Making a case paradigm shift in VAT administration
It is the considered view of many that the nation’s tax ecosystem, especially the VAT, needs to be changed to achieve the greater good for all.
One of those who share the view and very strongly too that there is need to shake things up in the VAT space is Omooba Olumuyiwa Sosanya, a renowned accountant.
Speaking in an interview with our correspondent recently, Sosanya, founding president, Association of National Accountants of Nigeria (ANAN), said at the centre of the issue of dwindling VAT receipts is the problem of inefficiency in the administration of the VAT.According to him, “The problem is overcentralisation of the administration. VAT is a federal government tax controlled by Federal Inland Revenue Service (FIRS). It is this overcentralisation that leads to inefficiency in the administration.”
Way forward
In the view of Sosanya, “We should decentralise it and allow the state to administer the VAT. As of now, all the state administers what we call Personal Income Tax. What is being generated on this compare to what could be generated if the states are allowed to collect the VAT is huge.”
Pressed further, he said, “Take Lagos State for instance, the total amount of money that is being generated on VAT is over 55 per cent. The FIRS doesn’t have any avenue of determining the genuine turnover from VAT. The Service is overwhelmed in the administration of VAT. Whereas if you allow the state to administer the VAT which is decentralised, each of the state will have time to update their staff to register the chargeable person.”
Most of the accountants, engineers, and consultant companies, he stressed, “Are not collecting VAT and from my own estimation, about 70-75 per cent are outside the VAT and that’s what brought us to this mess. There is no way we should not be collecting over 800 billion naira monthly. And when this is done, I’m not saying the rate of VAT should be increased because a lot of people have been agitating for that. If we do that, what we get is that the revenue for FIRS will be less because the people will now understand their taking. However, if we expand on it, it will bring more chargeable persons and businesses and that will generate up to N800 billion to N1trillion in a month. Some people will argue that the Ghana VAT is about 20 per cent. This is because the total of Ghana VAT is decentralised. Even if you’re a barbing saloon you’re captured, restaurants are captured, all private sectors in Ghana is captured, the same thing obtains in South Africa. The rate of VAT is less in Nigeria and look at the population of Ghana and South Africa, they are about 200 million, so we are supposed to generate more.”
Echoing similar sentiments, a tax expert, Bamidele Samson, some of the obstacles hampering the growth of VAT are the problem of inadequate personnel to drive the revenue mobilisation in that space, non-compliance of business owners, lack of transparency, evasion of VAT-able goods and services.
Federal government VAT revenue projections
Giving insight on the projected revenue earnings from VAT, Finance Minister, Hajia Zainab Ahmed, said the federal government has identified the expected sources of revenue to fund the N11.86 trillion budget proposed for the 2021 fiscal year.
The minister spoke last year during the presentation of the draft 2021–2023 medium-term expenditure framework (MTEF) and fiscal strategy paper (FSP).
During a virtual consultative session with civil society organisations in Abuja, organised private sector and the general public, the Minister said part of the funding for the budget would come from the export of 1.86 million barrels per day oil output at about $40 per barrel.
The minister said out of a net accrual to the Federation Account of N6.67 trillion (after 0.5% transfer to Police Trust Fund), total oil revenue, after all costs, deductions and derivations would come to about N4.09 trillion.
The federal government said it expects to realise about N5.46billion as net solid minerals revenue after payment of derivation; N1.41trillion as net corporate tax; N1.05trillion as Nigeria Customs revenue, and N124.8billion as revenues from special levies.
The federal government expects to earn about N244.5billion from its share of the value-added tax (VAT) Pool Account for the year.
To keep the total fiscal deficit of about N5.15trillion within the proposed 3% ceiling over the medium term, the Minister said the government was committed to finding new revenue sources, while taking steps to ensure a reduction in the cost of governance.About N1.9billion expected as minerals and mining revenue during the year was revised to about N790million. But the actual revenue realized from the sector was about N50million, an increase of about N60million, or 7%.
Total non-oil revenue, including company income tax (CIT), value-added tax (VAT), Nigeria Customs revenue and Federation Accounts levies, which was expected to be N1.6trillion, was revised to about N677.06billion.
FIRS projects high revenue through tax
Nigeria’s Federal Inland Revenue Service (FIRS) has disclosed that receipts from tax, which were previously supplementary, now account for about 70% of Nigeria’s total revenue. FIRS said other revenue lines, including oil, accounted for just 30% of the country’s revenue.
Executive Chairman of FIRS, Mr. Muhammad Nami, disclosed this recently in Abuja when he made a presentation titled, “Weathering Economic Turbulence,” at an interactive session with stakeholders.
The FIRS head revealed that the total Federation Account revenue for June 2020 was just N696 billion (about $2 billion), “which is equivalent to what a county in the United States spends.”
According to him, “Nigerian economy is projected to contract by over five per cent in 2020 due to COVID-19 and other disruptions. Oil prices have plummeted (from $97.98 in 2012 to below $50 in 2020).”
He said despite efforts by the FIRS and Nigeria Customs Service (NCS) to drive up Value Added Tax (VAT) collection, “Collection has indeed gone up, but Nigeria’s VAT gap remained at a pitiable 70%, compared with South Africa at 12%, Morocco at 28%, and Zimbabwe at 38%.”
Nami reiterated that Nigeria’s tax-to-Gross Domestic Product (GDP) ratio was currently about 6%, compared to Egypt at 15%, Ghana and Kenya at 17%, and South Africa at 28%.
The World Bank recommends a minimum of 15% Tax to GDP ratio for economic growth and poverty reduction, he stated.
Nami identified the problems of tax administration in the country to include the false belief that Nigeria is rich and does not require tax money, resistance to tax payment and tax being seen as an unnecessary burden, and lack of political action to tackle low level of tax payment.
(The Nation)
